Hangzhou Yitong New Material (SZSE:300930) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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 Yitong New Material (SZSE:300930), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Hangzhou Yitong New Material:

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

0.056 = CN¥53m ÷ (CN¥1.2b - CN¥215m) (Based on the trailing twelve months to September 2024).

So, Hangzhou Yitong New Material has an ROCE of 5.6%. On its own, that's a low figure but it's around the 6.8% average generated by the Metals and Mining industry.

Check out 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'd like to look at how Hangzhou Yitong New Material has performed in the past in other metrics, you can view this free graph of Hangzhou Yitong New Material's past earnings, revenue and cash flow.

What Can We Tell From Hangzhou Yitong New Material's ROCE Trend?

In terms of Hangzhou Yitong New Material's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 21%, but since then they've fallen to 5.6%. 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 Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hangzhou Yitong New Material. These growth trends haven't led to growth returns though, since the stock has fallen 17% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Hangzhou Yitong New Material, we've spotted 4 warning signs, and 2 of them are concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.