Slowing Rates Of Return At Hangzhou First Applied Material (SHSE:603806) Leave Little Room For Excitement

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Hangzhou First Applied Material (SHSE:603806) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 First Applied Material is:

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

0.091 = CN¥1.8b ÷ (CN¥22b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

Therefore, Hangzhou First Applied Material has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 5.6% generated by the Semiconductor industry, it's much better.

View our latest analysis for Hangzhou First Applied Material

Above you can see how the current ROCE for Hangzhou First Applied Material 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 Hangzhou First Applied Material .

What Does the ROCE Trend For Hangzhou First Applied Material Tell Us?

The returns on capital haven't changed much for Hangzhou First Applied Material in recent years. The company has consistently earned 9.1% for the last five years, and the capital employed within the business has risen 230% in that time. 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

As we've seen above, Hangzhou First Applied Material's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 79% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 1 warning sign for Hangzhou First Applied Material that we think you should be aware of.

While Hangzhou First Applied Material 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.