What Should You Know About Shaanxi Northwest New Technology Industry Company Limited's (HKG:8258) Return On Capital?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on Shaanxi Northwest New Technology Industry Company Limited (HKG:8258) stock.

If you purchase a 8258 share you are effectively becoming a partner with many other shareholders. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand Shaanxi Northwest New Technology Industry’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

Check out our latest analysis for Shaanxi Northwest New Technology Industry

ROCE: Explanation and Calculation

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business' ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Shaanxi Northwest New Technology Industry is good at growing investor capital. Take a look at the formula box beneath:

The calculation above shows that 8258’s earnings were 5.9% of capital employed. Comparing this to a healthy 15% benchmark shows Shaanxi Northwest New Technology Industry is currently unable to return a satisfactory amount to owners for the use of their capital, which isn't good for investors who have forgone other potentially solid companies.

A deeper look

The underperforming ROCE is not ideal for Shaanxi Northwest New Technology Industry investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, 8258's ROCE may increase, in which case your portfolio could benefit from holding the company. Because of this, it is important to look beyond the final value of 8258’s ROCE and understand what is happening to the individual components. Looking three years in the past, it is evident that 8258's ROCE has risen from 5.3%, indicating the company's capital returns have stengthened. We can see that earnings have increased from CN¥5.1m to CN¥8.9m whilst capital employed improved as well albeit by a relatively smaller amount, signifying ROCE increased as a result of a greater surge in earnings compared to the business' use of capital.

Next Steps

Despite 8258's current ROCE remains at an unattractive level, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don't forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine if an opportunity exists that isn't made apparent by looking at past data. If you're interested in diving deeper, take a look at what I've linked below for further information on these fundamentals and other potential investment opportunities.

1. Future Outlook: What are well-informed industry analysts predicting for 8258’s future growth? Take a look at our free research report of analyst consensus for 8258’s outlook.
2. Valuation: What is 8258 worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether 8258 is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.