Returns On Capital At Huazhong In-Vehicle Holdings (HKG:6830) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Huazhong In-Vehicle Holdings (HKG:6830) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Huazhong In-Vehicle Holdings is:

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

0.0055 = CN¥11m ÷ (CN¥3.5b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

Thus, Huazhong In-Vehicle Holdings has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.5%.

View our latest analysis for Huazhong In-Vehicle Holdings

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're interested in investigating Huazhong In-Vehicle Holdings' past further, check out this free graph covering Huazhong In-Vehicle Holdings' past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Huazhong In-Vehicle Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.5% from 10% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Huazhong In-Vehicle Holdings has decreased its current liabilities to 44% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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. Keep in mind 44% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Huazhong In-Vehicle Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Huazhong In-Vehicle Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 75% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Huazhong In-Vehicle Holdings we've found 4 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

While Huazhong In-Vehicle Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.