Capital Allocation Trends At Hangzhou Yitong New Material (SZSE:300930) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Yitong New Material (SZSE:300930) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Hangzhou Yitong New Material, this is the formula:

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

0.059 = CN¥53m ÷ (CN¥1.1b - CN¥192m) (Based on the trailing twelve months to June 2024).

So, Hangzhou Yitong New Material has an ROCE of 5.9%. On its own, that's a low figure but it's around the 7.0% average generated by the Metals and Mining industry.

See our latest analysis for Hangzhou Yitong New Material

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

The Trend Of ROCE

In terms of Hangzhou Yitong New Material's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.9% from 21% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Hangzhou Yitong New Material is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 19% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Hangzhou Yitong New Material (of which 2 make us uncomfortable!) that you should know about.

While Hangzhou Yitong New Material may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.