Hi-Trend Technology (Shanghai) (SHSE:688391) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Hi-Trend Technology (Shanghai) (SHSE:688391) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for Hi-Trend Technology (Shanghai):

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

0.034 = CN¥69m ÷ (CN¥2.2b - CN¥115m) (Based on the trailing twelve months to December 2023).

Therefore, Hi-Trend Technology (Shanghai) has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.0%.

Check out 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.

So How Is Hi-Trend Technology (Shanghai)'s ROCE Trending?

When we looked at the ROCE trend at Hi-Trend Technology (Shanghai), we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 3.4%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Hi-Trend Technology (Shanghai) has done well to pay down its current liabilities to 5.3% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 On Hi-Trend Technology (Shanghai)'s ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Hi-Trend Technology (Shanghai) 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 48% from where it was year ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 1 warning sign for Hi-Trend Technology (Shanghai) that we think you should be aware of.

While Hi-Trend Technology (Shanghai) 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.