Hangzhou Alltest Biotech (SHSE:688606) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Hangzhou Alltest Biotech (SHSE:688606) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Hangzhou Alltest Biotech is:

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

0.09 = CN¥351m ÷ (CN¥4.2b - CN¥274m) (Based on the trailing twelve months to December 2024).

So, Hangzhou Alltest Biotech has an ROCE of 9.0%. In absolute terms, that's a low return, but it's much better than the Medical Equipment industry average of 5.7%.

Check out our latest analysis for Hangzhou Alltest Biotech

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Hangzhou Alltest Biotech's past further, check out this free graph covering Hangzhou Alltest Biotech's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Hangzhou Alltest Biotech's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 28%, but since then they've fallen to 9.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Hangzhou Alltest Biotech's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Hangzhou Alltest Biotech is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last three years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 2 warning signs with Hangzhou Alltest Biotech (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.