What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Finework (Hu Nan) New Energy Technology (SZSE:301232), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Finework (Hu Nan) New Energy Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = CN¥54m ÷ (CN¥3.0b - CN¥1.2b) (Based on the trailing twelve months to March 2024).
So, Finework (Hu Nan) New Energy Technology has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Finework (Hu Nan) New Energy Technology.
What Does the ROCE Trend For Finework (Hu Nan) New Energy Technology Tell Us?
In terms of Finework (Hu Nan) New Energy Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.0% from 29% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Finework (Hu Nan) New Energy Technology's ROCE
While returns have fallen for Finework (Hu Nan) New Energy Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 29% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Finework (Hu Nan) New Energy Technology (of which 3 are concerning!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
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