Investors Could Be Concerned With Hangzhou Electronic Soul Network Technology's (SHSE:603258) Returns On 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Hangzhou Electronic Soul Network Technology (SHSE:603258), 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. The formula for this calculation on Hangzhou Electronic Soul Network Technology is:

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

0.036 = CN¥81m ÷ (CN¥2.7b - CN¥374m) (Based on the trailing twelve months to June 2024).

Thus, Hangzhou Electronic Soul Network Technology has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 5.4%.

Check out our latest analysis for Hangzhou Electronic Soul Network Technology

In the above chart we have measured Hangzhou Electronic Soul Network Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hangzhou Electronic Soul Network Technology for free.

What Can We Tell From Hangzhou Electronic Soul Network Technology's ROCE Trend?

On the surface, the trend of ROCE at Hangzhou Electronic Soul Network Technology doesn't inspire confidence. Around five years ago the returns on capital were 7.8%, but since then they've fallen to 3.6%. However it looks like Hangzhou Electronic Soul Network Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Hangzhou Electronic Soul Network Technology's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing, we've spotted 3 warning signs facing Hangzhou Electronic Soul Network Technology that you might find interesting.

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.