Guangdong HEC Technology Holding (SHSE:600673) Has Some Difficulty Using Its Capital Effectively

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Guangdong HEC Technology Holding (SHSE:600673), we weren't too upbeat about how things were going.

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

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 Guangdong HEC Technology Holding:

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

0.0025 = CN¥36m ÷ (CN¥26b - CN¥12b) (Based on the trailing twelve months to March 2024).

So, Guangdong HEC Technology Holding has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.7%.

Check out our latest analysis for Guangdong HEC Technology Holding

In the above chart we have measured Guangdong HEC Technology Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Guangdong HEC Technology Holding .

What Can We Tell From Guangdong HEC Technology Holding's ROCE Trend?

We are a bit worried about the trend of returns on capital at Guangdong HEC Technology Holding. Unfortunately the returns on capital have diminished from the 16% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Guangdong HEC Technology Holding to turn into a multi-bagger.

On a separate but related note, it's important to know that Guangdong HEC Technology Holding has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Guangdong HEC Technology Holding's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 15% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Guangdong HEC Technology Holding we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Guangdong HEC Technology Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.