Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Hebei Huatong Wires and Cables Group (SHSE:605196) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Hebei Huatong Wires and Cables Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥431m ÷ (CN¥6.2b - CN¥3.4b) (Based on the trailing twelve months to June 2023).
Therefore, Hebei Huatong Wires and Cables Group has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.3% it's much better.
Check out our latest analysis for Hebei Huatong Wires and Cables Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hebei Huatong Wires and Cables Group's ROCE against it's prior returns. If you'd like to look at how Hebei Huatong Wires and Cables Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Hebei Huatong Wires and Cables Group Tell Us?
We like the trends that we're seeing from Hebei Huatong Wires and Cables Group. The data shows that returns on capital have increased substantially over the last five years to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 103%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
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 54% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
What We Can Learn From Hebei Huatong Wires and Cables Group's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Hebei Huatong Wires and Cables Group has. Since the stock has only returned 4.1% to shareholders over the last year, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
If you want to continue researching Hebei Huatong Wires and Cables Group, you might be interested to know about the 1 warning sign that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
