What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Shijiazhuang Tonhe Electronics TechnologiesLtd (SZSE:300491) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shijiazhuang Tonhe Electronics TechnologiesLtd is:

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

0.081 = CN¥97m ÷ (CN¥2.0b - CN¥789m) (Based on the trailing twelve months to March 2024).

Therefore, Shijiazhuang Tonhe Electronics TechnologiesLtd has an ROCE of 8.1%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 6.0%.

Above you can see how the current ROCE for Shijiazhuang Tonhe Electronics TechnologiesLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shijiazhuang Tonhe Electronics TechnologiesLtd .

What Can We Tell From Shijiazhuang Tonhe Electronics TechnologiesLtd's ROCE Trend?

Shijiazhuang Tonhe Electronics TechnologiesLtd has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.1% on its capital. Not only that, but the company is utilizing 78% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 40% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Shijiazhuang Tonhe Electronics TechnologiesLtd's ROCE

To the delight of most shareholders, Shijiazhuang Tonhe Electronics TechnologiesLtd has now broken into profitability. Considering the stock has delivered 20% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Shijiazhuang Tonhe Electronics TechnologiesLtd does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Shijiazhuang Tonhe Electronics TechnologiesLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com