Shanghai Hajime Advanced Material Technology (SZSE:301000) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Shanghai Hajime Advanced Material Technology (SZSE:301000) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Shanghai Hajime Advanced Material Technology is:

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

0.071 = CN¥80m ÷ (CN¥1.3b - CN¥149m) (Based on the trailing twelve months to September 2023).

Therefore, Shanghai Hajime Advanced Material Technology has an ROCE of 7.1%. On its own that's a low return, but compared to the average of 5.6% generated by the Chemicals industry, it's much better.

View our latest analysis for Shanghai Hajime Advanced Material Technology

Above you can see how the current ROCE for Shanghai Hajime Advanced Material Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shanghai Hajime Advanced Material Technology .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Shanghai Hajime Advanced Material Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 32% over the last five years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Shanghai Hajime Advanced Material Technology has done well to pay down its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Shanghai Hajime Advanced Material Technology's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 0.4% over the last year, 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.

One final note, you should learn about the 2 warning signs we've spotted with Shanghai Hajime Advanced Material Technology (including 1 which is significant) .

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.