Returns On Capital Are Showing Encouraging Signs At Hangzhou Changchuan TechnologyLtd (SZSE:300604)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Hangzhou Changchuan TechnologyLtd (SZSE:300604) and its trend of ROCE, we really liked what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.11 = CN¥462m ÷ (CN¥6.9b - CN¥2.5b) (Based on the trailing twelve months to September 2024).

Thus, Hangzhou Changchuan TechnologyLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 5.9% it's much better.

See our latest analysis for Hangzhou Changchuan TechnologyLtd

In the above chart we have measured Hangzhou Changchuan TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hangzhou Changchuan TechnologyLtd for free.

What Does the ROCE Trend For Hangzhou Changchuan TechnologyLtd Tell Us?

We're delighted to see that Hangzhou Changchuan TechnologyLtd is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 11% on its capital. And unsurprisingly, like most companies trying to break into the black, Hangzhou Changchuan TechnologyLtd is utilizing 344% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 37% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Hangzhou Changchuan TechnologyLtd's ROCE

Long story short, we're delighted to see that Hangzhou Changchuan TechnologyLtd's reinvestment activities have paid off and the company is now profitable. And a remarkable 241% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Hangzhou Changchuan TechnologyLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Hangzhou Changchuan TechnologyLtd 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.