Returns On Capital At Haina Intelligent Equipment International Holdings (HKG:1645) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Haina Intelligent Equipment International Holdings, this is the formula:

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

0.037 = CN¥13m ÷ (CN¥628m - CN¥270m) (Based on the trailing twelve months to December 2021).

Thus, Haina Intelligent Equipment International Holdings has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.5%.

View 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 Does the ROCE Trend For Haina Intelligent Equipment International Holdings Tell Us?

In terms of Haina Intelligent Equipment International Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.7% from 26% 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 side note, Haina Intelligent Equipment International Holdings has done well to pay down its current liabilities to 43% 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. 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 43% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Haina Intelligent Equipment International Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Haina Intelligent Equipment International Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 42% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Haina Intelligent Equipment International Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...

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.