Huizhou Speed Wireless TechnologyLtd's (SZSE:300322) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Huizhou Speed Wireless TechnologyLtd (SZSE:300322), we don't think it's current trends fit the mold of a multi-bagger.

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 Huizhou Speed Wireless TechnologyLtd, this is the formula:

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

0.0052 = CN¥6.9m ÷ (CN¥2.9b - CN¥1.6b) (Based on the trailing twelve months to September 2024).

So, Huizhou Speed Wireless TechnologyLtd has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Communications industry average of 4.1%.

Check out our latest analysis for Huizhou Speed Wireless TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Huizhou Speed Wireless TechnologyLtd has performed in the past in other metrics, you can view this free graph of Huizhou Speed Wireless TechnologyLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Huizhou Speed Wireless TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 9.5% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Huizhou Speed Wireless TechnologyLtd has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Huizhou Speed Wireless TechnologyLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Huizhou Speed Wireless TechnologyLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 31% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Huizhou Speed Wireless TechnologyLtd, we've discovered 3 warning signs that you should be aware of.

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.