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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Ningbo Huaxiang Electronic (SZSE:002048) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Ningbo Huaxiang Electronic is:

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

0.098 = CN¥1.5b ÷ (CN¥25b - CN¥10b) (Based on the trailing twelve months to June 2023).

Therefore, Ningbo Huaxiang Electronic has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 5.6%.

View our latest analysis for Ningbo Huaxiang Electronic

Above you can see how the current ROCE for Ningbo Huaxiang Electronic compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ningbo Huaxiang Electronic here for free.

So How Is Ningbo Huaxiang Electronic's ROCE Trending?

In terms of Ningbo Huaxiang Electronic's historical ROCE trend, it doesn't exactly demand attention. The company has employed 53% more capital in the last five years, and the returns on that capital have remained stable at 9.8%. 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.

Another thing to note, Ningbo Huaxiang Electronic has a high ratio of current liabilities to total assets of 40%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, Ningbo Huaxiang Electronic has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 85% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for Ningbo Huaxiang Electronic that we think you should be aware of.

While Ningbo Huaxiang Electronic 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.