Hengxin Technology (HKG:1085) Will Will Want To Turn Around Its Return Trends

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. In light of that, when we looked at Hengxin Technology (HKG:1085) 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. Analysts use this formula to calculate it for Hengxin Technology:

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

0.029 = CN¥50m ÷ (CN¥2.2b - CN¥481m) (Based on the trailing twelve months to December 2020).

So, Hengxin Technology has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 7.0%.

View our latest analysis for Hengxin Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hengxin Technology's ROCE against it's prior returns. If you're interested in investigating Hengxin Technology's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Hengxin Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.9% from 10% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Hengxin Technology's ROCE

In summary, we're somewhat concerned by Hengxin Technology's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 34% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Hengxin Technology (including 1 which is concerning) .

While Hengxin 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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