Henan Hengxing Science & TechnologyLtd (SZSE:002132) May Have Issues Allocating Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Henan Hengxing Science & TechnologyLtd (SZSE:002132), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Henan Hengxing Science & TechnologyLtd is:

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

0.028 = CN¥123m ÷ (CN¥8.1b - CN¥3.8b) (Based on the trailing twelve months to September 2024).

So, Henan Hengxing Science & TechnologyLtd has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.8%.

See our latest analysis for Henan Hengxing Science & TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Henan Hengxing Science & TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Henan Hengxing Science & TechnologyLtd's past further, check out this free graph covering Henan Hengxing Science & TechnologyLtd's past earnings, revenue and cash flow.

What Can We Tell From Henan Hengxing Science & TechnologyLtd's ROCE Trend?

On the surface, the trend of ROCE at Henan Hengxing Science & TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.8% from 4.5% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Henan Hengxing Science & TechnologyLtd has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Henan Hengxing Science & TechnologyLtd is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 17% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Henan Hengxing Science & TechnologyLtd does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Henan Hengxing Science & TechnologyLtd 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.