What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou (SZSE:000523), it didn't seem to tick all of these boxes.

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 Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou:

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

0.039 = CN¥110m ÷ (CN¥3.5b - CN¥596m) (Based on the trailing twelve months to September 2024).

So, Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou has an ROCE of 3.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.8%.

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

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 11% five years ago, while the business's capital employed increased by 38%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's earnings and if they change as a result from the capital raise.

On a related note, Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou has decreased its current liabilities to 17% of total assets. Since the ratio used to be 72%, that's a significant reduction and it no doubt explains the drop 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, we're somewhat concerned by Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 55% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Hongmian Zhihui Science and Technology InnovationLtd.Guangzhou 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.