China Electronics Huada Technology Company Limited (HKG:85): A Look At Return On Capital

This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between China Electronics Huada Technology Company Limited (HKG:85)’s return fundamentals and stock market performance.

Purchasing China Electronics Huada Technology gives you an ownership stake in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Thus, to understand how your money can grow by investing in China Electronics Huada Technology, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

Check out our latest analysis for China Electronics Huada Technology

Calculating Return On Capital Employed for 85

You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. 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. To determine China Electronics Huada Technology's capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated China Electronics Huada Technology’s ROCE for you below:

As you can see, 85 earned HK$5.2 from every HK$100 you invested over the previous twelve months. This shows China Electronics Huada Technology provides a dull capital return that is below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if 85 is clever with their reinvestments or dividend payments, investors can still grow their capital but may fall behind other more attractive opportunities in the market.

What is causing this?

The underperforming ROCE is not ideal for China Electronics Huada Technology investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, 85's ROCE may increase, in which case your portfolio could benefit from holding the company. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking three years in the past, it is evident that 85's ROCE has risen from 3.76%, indicating the company's capital returns have stengthened. Over the same period, EBT went from HK$218.06m to HK$106.67m, but the use of capital has fallen further due to a decline in total assets employed and greater use of borrowed capital (increase in current liabilities) , which means that although earnings are smaller than before, 85 requires less capital to produce each HK$1 of earnings.

Next Steps

Although China Electronics Huada Technology’s ROCE is currently below the acceptable benchmark, 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 management ability to determine whether there is potential for return by focusing our attention elsewhere. 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 85’s future growth? Take a look at our free research report of analyst consensus for 85’s outlook.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for China Electronics Huada Technology's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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.