Returns On Capital Signal Tricky Times Ahead For Huizhong Instrumentation (SZSE:300371)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 Huizhong Instrumentation (SZSE:300371), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Huizhong Instrumentation:

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

0.079 = CN¥86m ÷ (CN¥1.2b - CN¥94m) (Based on the trailing twelve months to June 2024).

Thus, Huizhong Instrumentation has an ROCE of 7.9%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.4%.

See our latest analysis for Huizhong Instrumentation

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 Huizhong Instrumentation has performed in the past in other metrics, you can view this free graph of Huizhong Instrumentation's past earnings, revenue and cash flow.

What Does the ROCE Trend For Huizhong Instrumentation Tell Us?

When we looked at the ROCE trend at Huizhong Instrumentation, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

We're a bit apprehensive about Huizhong Instrumentation because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 1.9% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Huizhong Instrumentation (including 2 which make us uncomfortable) .

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.