Here's What's Concerning About Haoxi Health Technology's (NASDAQ:HAO) Returns On Capital

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Haoxi Health Technology (NASDAQ:HAO), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Haoxi Health Technology, this is the formula:

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

0.041 = US$772k ÷ (US$22m - US$3.3m) (Based on the trailing twelve months to December 2024).

So, Haoxi Health Technology has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Media industry average of 8.8%.

Check out our latest analysis for Haoxi Health Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Haoxi Health Technology has performed in the past in other metrics, you can view this free graph of Haoxi Health Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Haoxi Health Technology Tell Us?

When we looked at the ROCE trend at Haoxi Health Technology, we didn't gain much confidence. Over the last two years, returns on capital have decreased to 4.1% from 58% two years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Haoxi Health Technology has decreased its current liabilities to 15% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Haoxi Health Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Haoxi Health Technology is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 99% over the last year, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

One more thing: We've identified 5 warning signs with Haoxi Health Technology (at least 3 which are significant) , and understanding these would certainly be useful.

While Haoxi Health 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.