Investors Could Be Concerned With Hangzhou Tianyuan Pet Products' (SZSE:301335) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 Hangzhou Tianyuan Pet Products (SZSE:301335), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Hangzhou Tianyuan Pet Products is:

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

0.038 = CN¥79m ÷ (CN¥2.7b - CN¥571m) (Based on the trailing twelve months to June 2024).

Therefore, Hangzhou Tianyuan Pet Products has an ROCE of 3.8%. Even though it's in line with the industry average of 4.0%, it's still a low return by itself.

See our latest analysis for Hangzhou Tianyuan Pet Products

Above you can see how the current ROCE for Hangzhou Tianyuan Pet Products compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hangzhou Tianyuan Pet Products for free.

What Can We Tell From Hangzhou Tianyuan Pet Products' ROCE Trend?

When we looked at the ROCE trend at Hangzhou Tianyuan Pet Products, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.8% from 20% five years ago. 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Hangzhou Tianyuan Pet Products is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 16% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a separate note, we've found 3 warning signs for Hangzhou Tianyuan Pet Products you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.