If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Wuxi Hongsheng Heat Exchanger Manufacturing's (SHSE:603090) returns on capital, so let's have a look.

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 Wuxi Hongsheng Heat Exchanger Manufacturing, this is the formula:

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

0.15 = CN¥85m ÷ (CN¥841m - CN¥258m) (Based on the trailing twelve months to September 2023).

Therefore, Wuxi Hongsheng Heat Exchanger Manufacturing has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.1% it's much better.

Check out our latest analysis for Wuxi Hongsheng Heat Exchanger Manufacturing

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, revenue and cash flow of Wuxi Hongsheng Heat Exchanger Manufacturing, check out these free graphs here.

The Trend Of ROCE

Wuxi Hongsheng Heat Exchanger Manufacturing has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 174% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line

To sum it up, Wuxi Hongsheng Heat Exchanger Manufacturing is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 118% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Wuxi Hongsheng Heat Exchanger Manufacturing can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Wuxi Hongsheng Heat Exchanger Manufacturing and understanding this should be part of your investment process.

While Wuxi Hongsheng Heat Exchanger Manufacturing 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.