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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Zhuhai Huajin Capital (SZSE:000532), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Zhuhai Huajin Capital:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = CN¥87m ÷ (CN¥2.4b - CN¥655m) (Based on the trailing twelve months to March 2024).
Thus, Zhuhai Huajin Capital has an ROCE of 5.0%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.
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 Zhuhai Huajin Capital has performed in the past in other metrics, you can view this free graph of Zhuhai Huajin Capital's past earnings, revenue and cash flow.
What Can We Tell From Zhuhai Huajin Capital's ROCE Trend?
On the surface, the trend of ROCE at Zhuhai Huajin Capital doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. 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.
On a related note, Zhuhai Huajin Capital has decreased its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.
Our Take On Zhuhai Huajin Capital's ROCE
We're a bit apprehensive about Zhuhai Huajin Capital because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 37% 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'd like to know about the risks facing Zhuhai Huajin Capital, we've discovered 1 warning sign that you should be aware of.
While Zhuhai Huajin Capital 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.
