Hangzhou Changchuan TechnologyLtd (SZSE:300604) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Hangzhou Changchuan TechnologyLtd (SZSE:300604) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hangzhou Changchuan TechnologyLtd is:

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

0.0066 = CN¥25m ÷ (CN¥5.6b - CN¥1.8b) (Based on the trailing twelve months to September 2023).

Thus, Hangzhou Changchuan TechnologyLtd has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.2%.

View our latest analysis for Hangzhou Changchuan TechnologyLtd

Above you can see how the current ROCE for Hangzhou Changchuan TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hangzhou Changchuan TechnologyLtd .

What Can We Tell From Hangzhou Changchuan TechnologyLtd's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 8.7% five years ago, while the business's capital employed increased by 720%. That being said, Hangzhou Changchuan TechnologyLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hangzhou Changchuan TechnologyLtd's earnings and if they change as a result from the capital raise.

The Key Takeaway

In summary, Hangzhou Changchuan TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 181% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 3 warning signs with Hangzhou Changchuan TechnologyLtd (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.