Hubei Huaqiang High-Tech (SHSE:688151) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Hubei Huaqiang High-Tech (SHSE:688151), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Hubei Huaqiang High-Tech:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0038 = CN¥17m ÷ (CN¥5.0b - CN¥442m) (Based on the trailing twelve months to December 2024).

Thus, Hubei Huaqiang High-Tech has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 6.8%.

View our latest analysis for Hubei Huaqiang High-Tech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hubei Huaqiang High-Tech's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hubei Huaqiang High-Tech.

The Trend Of ROCE

On the surface, the trend of ROCE at Hubei Huaqiang High-Tech doesn't inspire confidence. Around five years ago the returns on capital were 9.7%, but since then they've fallen to 0.4%. However it looks like Hubei Huaqiang High-Tech might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Hubei Huaqiang High-Tech has decreased its current liabilities to 8.9% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Hubei Huaqiang High-Tech's ROCE

In summary, Hubei Huaqiang High-Tech is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 33% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 2 warning signs with Hubei Huaqiang High-Tech (at least 1 which is concerning) , and understanding these would certainly be useful.

While Hubei Huaqiang High-Tech isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.