Some Investors May Be Worried About Shanghai Huide Science & TechnologyLtd's (SHSE:603192) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Shanghai Huide Science & TechnologyLtd (SHSE:603192) and its ROCE trend, we weren't exactly thrilled.

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 Shanghai Huide Science & TechnologyLtd:

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

0.028 = CN¥42m ÷ (CN¥2.3b - CN¥774m) (Based on the trailing twelve months to March 2024).

Thus, Shanghai Huide Science & TechnologyLtd has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

See our latest analysis for Shanghai Huide Science & TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Huide Science & TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Shanghai Huide Science & TechnologyLtd has performed in the past in other metrics, you can view this free graph of Shanghai Huide Science & TechnologyLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Shanghai Huide Science & TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 2.8%. 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 side note, Shanghai Huide Science & TechnologyLtd's current liabilities have increased over the last five years to 34% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.8%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Shanghai Huide Science & TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Shanghai Huide Science & TechnologyLtd has the makings of a multi-bagger.

If you want to know some of the risks facing Shanghai Huide Science & TechnologyLtd we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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.

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