Hoshine Silicon Industry's (SHSE:603260) Returns On Capital Not Reflecting Well On The Business

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Hoshine Silicon Industry (SHSE:603260) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Hoshine Silicon Industry:

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

0.073 = CN¥4.1b ÷ (CN¥76b - CN¥20b) (Based on the trailing twelve months to September 2023).

Thus, Hoshine Silicon Industry has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 5.9% generated by the Chemicals industry, it's much better.

See our latest analysis for Hoshine Silicon Industry

In the above chart we have measured Hoshine Silicon Industry's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Hoshine Silicon Industry .

What Does the ROCE Trend For Hoshine Silicon Industry Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 35% five years ago, while capital employed has grown 482%. Usually this isn't ideal, but given Hoshine Silicon Industry conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Hoshine Silicon Industry probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Hoshine Silicon Industry has done well to pay down its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Hoshine Silicon Industry's ROCE

In summary, Hoshine Silicon Industry is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 34% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Hoshine Silicon Industry we've found 4 warning signs (2 are potentially serious!) 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.