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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Hangzhou Changchuan TechnologyLtd (SZSE:300604), 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. To calculate this metric for Hangzhou Changchuan TechnologyLtd, this is the formula:

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

0.0066 = CN¥25m ÷ (CN¥5.6b - CN¥1.8b) (Based on the trailing twelve months to September 2023).

Therefore, Hangzhou Changchuan TechnologyLtd has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 5.6%.

In the above chart we have measured Hangzhou Changchuan TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hangzhou Changchuan TechnologyLtd .

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 8.7% five years ago, while capital employed has grown 720%. Usually this isn't ideal, but given Hangzhou Changchuan TechnologyLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Hangzhou Changchuan TechnologyLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line On Hangzhou Changchuan TechnologyLtd's ROCE

In summary, Hangzhou Changchuan TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 178% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know more about Hangzhou Changchuan TechnologyLtd, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

While Hangzhou Changchuan TechnologyLtd 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.