Hangzhou Oxygen Plant GroupLtd's (SZSE:002430) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 Oxygen Plant GroupLtd (SZSE:002430), 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. Analysts use this formula to calculate it for Hangzhou Oxygen Plant GroupLtd:

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

0.097 = CN¥1.4b ÷ (CN¥23b - CN¥8.2b) (Based on the trailing twelve months to June 2024).

So, Hangzhou Oxygen Plant GroupLtd has an ROCE of 9.7%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

View our latest analysis for Hangzhou Oxygen Plant GroupLtd

In the above chart we have measured Hangzhou Oxygen Plant GroupLtd'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 Oxygen Plant GroupLtd .

What Does the ROCE Trend For Hangzhou Oxygen Plant GroupLtd Tell Us?

On the surface, the trend of ROCE at Hangzhou Oxygen Plant GroupLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.7% from 14% five years ago. However it looks like Hangzhou Oxygen Plant GroupLtd 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.

The Bottom Line

To conclude, we've found that Hangzhou Oxygen Plant GroupLtd is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 79% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 1 warning sign for Hangzhou Oxygen Plant GroupLtd you'll probably want to know about.

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.