Haina Intelligent Equipment International Holdings' (HKG:1645) 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? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Haina Intelligent Equipment International Holdings (HKG:1645) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Haina Intelligent Equipment International Holdings is:

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

0.09 = CN¥32m ÷ (CN¥668m - CN¥316m) (Based on the trailing twelve months to June 2021).

Therefore, Haina Intelligent Equipment International Holdings has an ROCE of 9.0%. On its own, that's a low figure but it's around the 10.0% average generated by the Machinery industry.

See our latest analysis for Haina Intelligent Equipment International Holdings

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Haina Intelligent Equipment International Holdings doesn't inspire confidence. Over the last four years, returns on capital have decreased to 9.0% from 43% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Haina Intelligent Equipment International Holdings has decreased its current liabilities to 47% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 47% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Haina Intelligent Equipment International Holdings. And the stock has followed suit returning a meaningful 80% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Haina Intelligent Equipment International Holdings we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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.

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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