We Like These Underlying Return On Capital Trends At China Electronics Huada Technology (HKG:85)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So when we looked at China Electronics Huada Technology (HKG:85) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for China Electronics Huada Technology:

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

0.045 = HK$56m ÷ (HK$2.6b - HK$1.4b) (Based on the trailing twelve months to June 2021).

Thus, China Electronics Huada Technology has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 13%.

Check out our latest analysis for China Electronics Huada Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Electronics Huada Technology's ROCE against it's prior returns. If you'd like to look at how China Electronics Huada Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From China Electronics Huada Technology's ROCE Trend?

While the ROCE is still rather low for China Electronics Huada Technology, we're glad to see it heading in the right direction. We found that the returns on capital employed over the last five years have risen by 137%. The company is now earning HK$0.05 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 27% less than it was five years ago, which can be indicative of a business that's improving its efficiency. China Electronics Huada Technology may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a related note, the company's ratio of current liabilities to total assets has decreased to 53%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

Our Take On China Electronics Huada Technology's ROCE

From what we've seen above, China Electronics Huada Technology has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 60% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 2 warning signs we've spotted with China Electronics Huada Technology (including 1 which is concerning) .

While China Electronics Huada Technology 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.