If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at Chengdu Haoneng Technology (SHSE:603809) and its ROCE trend, we weren't exactly thrilled.
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 Chengdu Haoneng Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = CN¥226m ÷ (CN¥5.1b - CN¥1.3b) (Based on the trailing twelve months to June 2023).
So, Chengdu Haoneng Technology has an ROCE of 5.9%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.
Check out our latest analysis for Chengdu Haoneng Technology
In the above chart we have measured Chengdu Haoneng Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Chengdu Haoneng Technology here for free.
So How Is Chengdu Haoneng Technology's ROCE Trending?
On the surface, the trend of ROCE at Chengdu Haoneng Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Chengdu Haoneng Technology is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 92% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.
Chengdu Haoneng Technology does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.
While Chengdu Haoneng Technology 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.
