Shanghai Hajime Advanced Material Technology (SZSE:301000) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. 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.

Return On Capital Employed (ROCE): What Is It?

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. 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)

0.12 = CN¥135m ÷ (CN¥1.3b - CN¥159m) (Based on the trailing twelve months to September 2024).

So, Shanghai Hajime Advanced Material Technology has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Chemicals industry.

Check out 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 Does the ROCE Trend For Shanghai Hajime Advanced Material Technology Tell Us?

On the surface, the trend of ROCE at Shanghai Hajime Advanced Material Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 38% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

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

While returns have fallen for Shanghai Hajime Advanced Material Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 258% to shareholders in the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, Shanghai Hajime Advanced Material Technology does come with some risks, and we've found 3 warning signs that you should be aware of.

While Shanghai Hajime Advanced Material Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.