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. And in light of that, the trends we're seeing at Shanghai Hanbell Precise Machinery's (SZSE:002158) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Shanghai Hanbell Precise Machinery is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = CN¥931m ÷ (CN¥6.4b - CN¥2.6b) (Based on the trailing twelve months to September 2023).
So, Shanghai Hanbell Precise Machinery has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 6.2% earned by companies in a similar industry.
View our latest analysis for Shanghai Hanbell Precise Machinery
In the above chart we have measured Shanghai Hanbell Precise Machinery'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 Shanghai Hanbell Precise Machinery here for free.
What The Trend Of ROCE Can Tell Us
The trends we've noticed at Shanghai Hanbell Precise Machinery are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 24%. The amount of capital employed has increased too, by 75%. 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, Shanghai Hanbell Precise Machinery's current liabilities are still rather high at 40% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Shanghai Hanbell Precise Machinery's ROCE
To sum it up, Shanghai Hanbell Precise Machinery has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing, we've spotted 1 warning sign facing Shanghai Hanbell Precise Machinery that you might find interesting.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
