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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at HeNan Splendor Science & Technology (SZSE:002296) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 HeNan Splendor Science & Technology:

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

0.023 = CN¥46m ÷ (CN¥2.5b - CN¥477m) (Based on the trailing twelve months to September 2023).

Therefore, HeNan Splendor Science & Technology has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Communications industry average of 5.1%.

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

The Trend Of ROCE

In terms of HeNan Splendor Science & Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.3% from 7.8% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

In summary, we're somewhat concerned by HeNan Splendor Science & Technology's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 8.2% 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.

If you want to continue researching HeNan Splendor Science & Technology, you might be interested to know about the 2 warning signs that our analysis has discovered.

While HeNan Splendor Science & Technology 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.