Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Hi-Trend Technology (Shanghai) (SHSE:688391), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Hi-Trend Technology (Shanghai):

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

0.0085 = CN¥16m ÷ (CN¥2.0b - CN¥131m) (Based on the trailing twelve months to September 2024).

So, Hi-Trend Technology (Shanghai) has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 4.9%.

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

What Does the ROCE Trend For Hi-Trend Technology (Shanghai) Tell Us?

On the surface, the trend of ROCE at Hi-Trend Technology (Shanghai) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.9% from 16% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a side note, Hi-Trend Technology (Shanghai) has done well to pay down its current liabilities to 6.6% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Hi-Trend Technology (Shanghai)'s ROCE

In summary, we're somewhat concerned by Hi-Trend Technology (Shanghai)'s diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 11% from where it was year ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Hi-Trend Technology (Shanghai) does have some risks though, and we've spotted 3 warning signs for Hi-Trend Technology (Shanghai) that you might be interested in.

While Hi-Trend Technology (Shanghai) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.