What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, Wuxi New Hongtai Electrical TechnologyLtd (SHSE:603016) looks quite promising in regards to its trends of return on capital.
Understanding 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. To calculate this metric for Wuxi New Hongtai Electrical TechnologyLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = CN¥68m ÷ (CN¥1.0b - CN¥177m) (Based on the trailing twelve months to September 2023).
Thus, Wuxi New Hongtai Electrical TechnologyLtd has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 5.9%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Wuxi New Hongtai Electrical TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Wuxi New Hongtai Electrical TechnologyLtd's past further, check out this free graph covering Wuxi New Hongtai Electrical TechnologyLtd's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Wuxi New Hongtai Electrical TechnologyLtd is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 20% in that same time. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Wuxi New Hongtai Electrical TechnologyLtd's ROCE
As discussed above, Wuxi New Hongtai Electrical TechnologyLtd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 204% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to continue researching Wuxi New Hongtai Electrical TechnologyLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
