What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Hangzhou Huning Elevator Parts (SZSE:300669) and its ROCE trend, we weren't exactly thrilled.

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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. To calculate this metric for Hangzhou Huning Elevator Parts, this is the formula:

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

0.03 = CN¥27m ÷ (CN¥1.0b - CN¥120m) (Based on the trailing twelve months to September 2024).

Therefore, Hangzhou Huning Elevator Parts has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.4%.

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

What Can We Tell From Hangzhou Huning Elevator Parts' ROCE Trend?

In terms of Hangzhou Huning Elevator Parts' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

What We Can Learn From Hangzhou Huning Elevator Parts' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Hangzhou Huning Elevator Parts have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 5.6% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Hangzhou Huning Elevator Parts does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Hangzhou Huning Elevator Parts 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.