Returns On Capital At Hangzhou Prevail Optoelectronic Equipment (SZSE:300710) Paint A Concerning Picture

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Hangzhou Prevail Optoelectronic Equipment (SZSE:300710), the trends above didn't look too great.

What Is 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. The formula for this calculation on Hangzhou Prevail Optoelectronic Equipment is:

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

0.011 = CN¥7.6m ÷ (CN¥919m - CN¥227m) (Based on the trailing twelve months to March 2024).

Therefore, Hangzhou Prevail Optoelectronic Equipment has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Communications industry average of 3.9%.

Check out our latest analysis for Hangzhou Prevail Optoelectronic Equipment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Prevail Optoelectronic Equipment's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hangzhou Prevail Optoelectronic Equipment.

How Are Returns Trending?

There is reason to be cautious about Hangzhou Prevail Optoelectronic Equipment, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 2.2% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Hangzhou Prevail Optoelectronic Equipment to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 27% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Hangzhou Prevail Optoelectronic Equipment, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

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.

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