There Are Reasons To Feel Uneasy About Hangzhou Huaguang Advanced Welding MaterialsLtd's (SHSE:688379) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. 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 Hangzhou Huaguang Advanced Welding MaterialsLtd (SHSE:688379) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hangzhou Huaguang Advanced Welding MaterialsLtd is:

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

0.084 = CN¥96m ÷ (CN¥2.1b - CN¥959m) (Based on the trailing twelve months to June 2024).

Thus, Hangzhou Huaguang Advanced Welding MaterialsLtd has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 7.1%.

View our latest analysis for Hangzhou Huaguang Advanced Welding MaterialsLtd

Above you can see how the current ROCE for Hangzhou Huaguang Advanced Welding MaterialsLtd 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 Huaguang Advanced Welding MaterialsLtd for free.

What Can We Tell From Hangzhou Huaguang Advanced Welding MaterialsLtd's ROCE Trend?

On the surface, the trend of ROCE at Hangzhou Huaguang Advanced Welding MaterialsLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 46%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Hangzhou Huaguang Advanced Welding MaterialsLtd's ROCE

While returns have fallen for Hangzhou Huaguang Advanced Welding MaterialsLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 42% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Hangzhou Huaguang Advanced Welding MaterialsLtd, we've spotted 2 warning signs, and 1 of them is concerning.

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.

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.