HeNan Splendor Science & Technology's (SZSE:002296) Returns Have Hit A Wall

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, from a first glance at HeNan Splendor Science & Technology (SZSE:002296) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 HeNan Splendor Science & Technology:

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

0.073 = CN¥162m ÷ (CN¥2.7b - CN¥483m) (Based on the trailing twelve months to March 2024).

So, HeNan Splendor Science & Technology has an ROCE of 7.3%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 3.9%.

View our latest analysis for HeNan Splendor Science & Technology

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

What Can We Tell From HeNan Splendor Science & Technology's ROCE Trend?

There are better returns on capital out there than what we're seeing at HeNan Splendor Science & Technology. The company has consistently earned 7.3% for the last five years, and the capital employed within the business has risen 42% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

In conclusion, HeNan Splendor Science & Technology has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 19% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know more about HeNan Splendor Science & Technology, we've spotted 4 warning signs, and 1 of them makes us a bit uncomfortable.

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.

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