If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Ningbo Orient Wires & CablesLtd (SHSE:603606) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Ningbo Orient Wires & CablesLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥1.1b ÷ (CN¥10b - CN¥3.3b) (Based on the trailing twelve months to September 2023).
Thus, Ningbo Orient Wires & CablesLtd has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.3% generated by the Electrical industry.
View our latest analysis for Ningbo Orient Wires & CablesLtd
In the above chart we have measured Ningbo Orient Wires & CablesLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ningbo Orient Wires & CablesLtd.
What The Trend Of ROCE Can Tell Us
The trends we've noticed at Ningbo Orient Wires & CablesLtd are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 315% more capital is being employed now too. So we're very much inspired by what we're seeing at Ningbo Orient Wires & CablesLtd thanks to its ability to profitably reinvest capital.
One more thing to note, Ningbo Orient Wires & CablesLtd has decreased current liabilities to 32% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
What We Can Learn From Ningbo Orient Wires & CablesLtd'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 Ningbo Orient Wires & CablesLtd has. And a remarkable 506% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to continue researching Ningbo Orient Wires & CablesLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Ningbo Orient Wires & CablesLtd 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.
