Investors Met With Slowing Returns on Capital At Hangzhou Electronic Soul Network Technology (SHSE:603258)

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Hangzhou Electronic Soul Network Technology (SHSE:603258) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Hangzhou Electronic Soul Network Technology is:

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

0.053 = CN¥125m ÷ (CN¥2.7b - CN¥391m) (Based on the trailing twelve months to September 2023).

So, Hangzhou Electronic Soul Network Technology has an ROCE of 5.3%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 4.4%.

See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Hangzhou Electronic Soul Network Technology .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Hangzhou Electronic Soul Network Technology. Over the past five years, ROCE has remained relatively flat at around 5.3% and the business has deployed 42% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Hangzhou Electronic Soul Network Technology's ROCE

In conclusion, Hangzhou Electronic Soul Network Technology has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 5.6% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Hangzhou Electronic Soul Network Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

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.