Hongli Zhihui GroupLtd's (SZSE:300219) Returns On Capital Not Reflecting Well On The Business

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Hongli Zhihui GroupLtd (SZSE:300219), the trends above didn't look too great.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Hongli Zhihui GroupLtd, this is the formula:

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

0.049 = CN¥160m ÷ (CN¥5.2b - CN¥1.9b) (Based on the trailing twelve months to March 2024).

So, Hongli Zhihui GroupLtd has an ROCE of 4.9%. On its own, that's a low figure but it's around the 4.1% average generated by the Semiconductor industry.

View our latest analysis for Hongli Zhihui GroupLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hongli Zhihui GroupLtd's ROCE against it's prior returns. If you'd like to look at how Hongli Zhihui GroupLtd has performed in the past in other metrics, you can view this free graph of Hongli Zhihui GroupLtd's past earnings, revenue and cash flow.

So How Is Hongli Zhihui GroupLtd's ROCE Trending?

There is reason to be cautious about Hongli Zhihui GroupLtd, given the returns are trending downwards. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hongli Zhihui GroupLtd becoming one if things continue as they have.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And long term shareholders have watched their investments stay flat over the last five years. 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 2 warning signs for Hongli Zhihui GroupLtd that we think you should be aware of.

While Hongli Zhihui GroupLtd 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.