Stock Analysis

Investors Could Be Concerned With Zhuhai Huajin Capital's (SZSE:000532) Returns On Capital

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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Zhuhai Huajin Capital (SZSE:000532), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Zhuhai Huajin Capital, this is the formula:

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

0.056 = CN¥90m ÷ (CN¥2.4b - CN¥798m) (Based on the trailing twelve months to September 2023).

So, Zhuhai Huajin Capital has an ROCE of 5.6%. On its own, that's a low figure but it's around the 5.5% average generated by the Electronic industry.

View our latest analysis for Zhuhai Huajin Capital

SZSE:000532 Return on Capital Employed March 25th 2024

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

What Does the ROCE Trend For Zhuhai Huajin Capital Tell Us?

On the surface, the trend of ROCE at Zhuhai Huajin Capital doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.6% from 11% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Zhuhai Huajin Capital has decreased its current liabilities to 33% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Zhuhai Huajin Capital's ROCE

We're a bit apprehensive about Zhuhai Huajin Capital because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 10% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Zhuhai Huajin Capital does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Zhuhai Huajin Capital is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.