Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou (SZSE:000523) Might Be Having Difficulty Using Its Capital Effectively

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou (SZSE:000523), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou:

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

0.033 = CN¥95m ÷ (CN¥3.4b - CN¥501m) (Based on the trailing twelve months to March 2024).

Therefore, Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Household Products industry average of 4.3%.

Check out our latest analysis for Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's ROCE against it's prior returns. If you're interested in investigating Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's past further, check out this free graph covering Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's past earnings, revenue and cash flow.

What Can We Tell From Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's ROCE Trend?

When we looked at the ROCE trend at Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.6% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou has decreased its current liabilities to 15% of total assets. Since the ratio used to be 73%, that's a significant reduction and it no doubt explains the drop in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's ROCE

Bringing it all together, while we're somewhat encouraged by Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 53% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a separate note, we've found 1 warning sign for Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou you'll probably want to know about.

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.

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