Hi-Trend Technology (Shanghai) (SHSE:688391) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Hi-Trend Technology (Shanghai) (SHSE:688391) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Hi-Trend Technology (Shanghai), this is the formula:

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

0.008 = CN¥15m ÷ (CN¥2.0b - CN¥131m) (Based on the trailing twelve months to September 2024).

Thus, Hi-Trend Technology (Shanghai) has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.9%.

See our latest analysis for Hi-Trend Technology (Shanghai)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hi-Trend Technology (Shanghai)'s ROCE against it's prior returns. If you're interested in investigating Hi-Trend Technology (Shanghai)'s past further, check out this free graph covering Hi-Trend Technology (Shanghai)'s past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Hi-Trend Technology (Shanghai)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. 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, Hi-Trend Technology (Shanghai) has decreased its current liabilities to 6.6% 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.

Our Take On Hi-Trend Technology (Shanghai)'s ROCE

In summary, we're somewhat concerned by Hi-Trend Technology (Shanghai)'s diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 10% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Hi-Trend Technology (Shanghai) does come with some risks, and we've found 3 warning signs that you should be aware of.

While Hi-Trend Technology (Shanghai) 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.