Hangzhou Onechance Tech Crop (SZSE:300792) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Hangzhou Onechance Tech Crop (SZSE:300792) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Hangzhou Onechance Tech Crop:

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

0.048 = CN¥136m ÷ (CN¥3.1b - CN¥255m) (Based on the trailing twelve months to September 2023).

Therefore, Hangzhou Onechance Tech Crop has an ROCE of 4.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.9%.

Check out our latest analysis for Hangzhou Onechance Tech Crop

In the above chart we have measured Hangzhou Onechance Tech Crop'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 Onechance Tech Crop for free.

So How Is Hangzhou Onechance Tech Crop's ROCE Trending?

In terms of Hangzhou Onechance Tech Crop's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 52% 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Hangzhou Onechance Tech Crop has done well to pay down its current liabilities to 8.2% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, Hangzhou Onechance Tech Crop is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 74% over the last three years. Therefore based on the analysis done in this article, we don't think Hangzhou Onechance Tech Crop has the makings of a multi-bagger.

If you'd like to know about the risks facing Hangzhou Onechance Tech Crop, we've discovered 2 warning signs that you should be aware of.

While Hangzhou Onechance Tech Crop may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.