Hunan Copote Science TechnologyLtd (SHSE:600476) Is Looking To Continue Growing Its Returns On Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Hunan Copote Science TechnologyLtd (SHSE:600476) looks quite promising in regards to its trends of return on capital.

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 Hunan Copote Science TechnologyLtd, this is the formula:

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

0.10 = CN¥34m ÷ (CN¥1.1b - CN¥806m) (Based on the trailing twelve months to September 2024).

Therefore, Hunan Copote Science TechnologyLtd has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 3.7% it's much better.

View our latest analysis for Hunan Copote Science TechnologyLtd

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

What Can We Tell From Hunan Copote Science TechnologyLtd's ROCE Trend?

We're delighted to see that Hunan Copote Science 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 10% on its capital. In addition to that, Hunan Copote Science TechnologyLtd is employing 47% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 71% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

In Conclusion...

Overall, Hunan Copote Science TechnologyLtd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 29% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

One more thing, we've spotted 2 warning signs facing Hunan Copote Science TechnologyLtd that you might find interesting.

While Hunan Copote Science 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.