The Returns On Capital At Hangzhou Onechance Tech Crop (SZSE:300792) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Hangzhou Onechance Tech Crop (SZSE:300792), it didn't seem to tick all of these boxes.

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 Hangzhou Onechance Tech Crop is:

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

0.023 = CN¥65m ÷ (CN¥3.0b - CN¥175m) (Based on the trailing twelve months to June 2024).

Thus, Hangzhou Onechance Tech Crop has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Media industry average of 3.8%.

See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Hangzhou Onechance Tech Crop .

What Does the ROCE Trend For Hangzhou Onechance Tech Crop Tell Us?

On the surface, the trend of ROCE at Hangzhou Onechance Tech Crop doesn't inspire confidence. Around five years ago the returns on capital were 52%, but since then they've fallen to 2.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Hangzhou Onechance Tech Crop has decreased its current liabilities to 5.8% of total assets. That could partly explain why the ROCE has dropped. 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

From the above analysis, we find it rather worrisome that returns on capital and sales for Hangzhou Onechance Tech Crop have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 22% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Hangzhou Onechance Tech Crop, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Hangzhou Onechance Tech Crop 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.