Here's What's Concerning About Hangzhou Alltest Biotech's (SHSE:688606) Returns On Capital

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Hangzhou Alltest Biotech (SHSE:688606) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Hangzhou Alltest Biotech, this is the formula:

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

0.025 = CN¥94m ÷ (CN¥4.1b - CN¥286m) (Based on the trailing twelve months to March 2024).

Therefore, Hangzhou Alltest Biotech has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 6.3%.

See 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'd like to look at how Hangzhou Alltest Biotech has performed in the past in other metrics, you can view this free graph of Hangzhou Alltest Biotech's past earnings, revenue and cash flow.

So How Is Hangzhou Alltest Biotech's ROCE Trending?

On the surface, the trend of ROCE at Hangzhou Alltest Biotech doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.5% from 27% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Hangzhou Alltest Biotech's ROCE

In summary, we're somewhat concerned by Hangzhou Alltest Biotech's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 40% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Hangzhou Alltest Biotech does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are concerning...

While Hangzhou Alltest Biotech may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.