Be Wary Of Hebei Gongda Keya Energy TechnologyLtd (SZSE:301197) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Hebei Gongda Keya Energy TechnologyLtd (SZSE:301197) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Hebei Gongda Keya Energy TechnologyLtd is:

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

0.018 = CN¥23m ÷ (CN¥1.5b - CN¥223m) (Based on the trailing twelve months to June 2024).

Therefore, Hebei Gongda Keya Energy TechnologyLtd has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Software industry average of 2.8%.

See our latest analysis for Hebei Gongda Keya Energy TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hebei Gongda Keya Energy TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hebei Gongda Keya Energy TechnologyLtd.

So How Is Hebei Gongda Keya Energy TechnologyLtd's ROCE Trending?

In terms of Hebei Gongda Keya Energy TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 1.8%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hebei Gongda Keya Energy TechnologyLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 38% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing Hebei Gongda Keya Energy TechnologyLtd we've found 4 warning signs (2 are concerning!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.