Zhuhai Huajin Capital (SZSE:000532) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhuhai Huajin Capital:

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

0.043 = CN¥71m ÷ (CN¥2.2b - CN¥581m) (Based on the trailing twelve months to September 2024).

So, Zhuhai Huajin Capital has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.5%.

Check out our latest analysis for Zhuhai Huajin Capital

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're interested in investigating Zhuhai Huajin Capital's past further, check out this free graph covering Zhuhai Huajin Capital's past earnings, revenue and cash flow.

What Can We Tell From Zhuhai Huajin Capital's ROCE Trend?

When we looked at the ROCE trend at Zhuhai Huajin Capital, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.3% from 11% five years ago. However it looks like Zhuhai Huajin Capital might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Zhuhai Huajin Capital has done well to pay down its current liabilities to 26% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Zhuhai Huajin Capital is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 13% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

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

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.