Investors Could Be Concerned With Hangzhou Huawang New Material TechnologyLtd's (SHSE:605377) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Hangzhou Huawang New Material TechnologyLtd (SHSE:605377), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Hangzhou Huawang New Material TechnologyLtd, this is the formula:

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

0.14 = CN¥556m ÷ (CN¥6.1b - CN¥2.1b) (Based on the trailing twelve months to September 2024).

So, Hangzhou Huawang New Material TechnologyLtd has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Forestry industry.

Check out our latest analysis for Hangzhou Huawang New Material TechnologyLtd

In the above chart we have measured Hangzhou Huawang New Material TechnologyLtd'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 Hangzhou Huawang New Material TechnologyLtd .

What Can We Tell From Hangzhou Huawang New Material TechnologyLtd's ROCE Trend?

On the surface, the trend of ROCE at Hangzhou Huawang New Material TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 18% five years ago. However it looks like Hangzhou Huawang New Material TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Hangzhou Huawang New Material TechnologyLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Hangzhou Huawang New Material TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 28% over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Hangzhou Huawang New Material TechnologyLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

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.