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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Henan Hengxing Science & TechnologyLtd (SZSE:002132) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Henan Hengxing Science & TechnologyLtd is:

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

0.025 = CN¥115m ÷ (CN¥8.5b - CN¥3.8b) (Based on the trailing twelve months to September 2023).

So, Henan Hengxing Science & TechnologyLtd has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.4%.

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're interested in investigating Henan Hengxing Science & TechnologyLtd's past further, check out this free graph covering Henan Hengxing Science & TechnologyLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Henan Hengxing Science & TechnologyLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 2.5% for the last five years, and the capital employed within the business has risen 31% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that Henan Hengxing Science & TechnologyLtd has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

As we've seen above, Henan Hengxing Science & TechnologyLtd's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 1.8% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know more about Henan Hengxing Science & TechnologyLtd, we've spotted 4 warning signs, and 1 of them doesn't sit too well with us.

While Henan Hengxing Science & TechnologyLtd 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.