Investors Could Be Concerned With Hubei Huitian New Materials' (SZSE:300041) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 Hubei Huitian New Materials (SZSE:300041) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Hubei Huitian New Materials is:

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

0.044 = CN¥177m ÷ (CN¥6.5b - CN¥2.4b) (Based on the trailing twelve months to June 2024).

Thus, Hubei Huitian New Materials has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

Check out our latest analysis for Hubei Huitian New Materials

In the above chart we have measured Hubei Huitian New Materials' 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 Hubei Huitian New Materials .

What Does the ROCE Trend For Hubei Huitian New Materials Tell Us?

In terms of Hubei Huitian New Materials' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.4% from 7.4% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Hubei Huitian New Materials' ROCE

Bringing it all together, while we're somewhat encouraged by Hubei Huitian New Materials' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 4.0% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 3 warning signs for Hubei Huitian New Materials 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.