To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, from a first glance at Hefei Kewell Power SystemLtd (SHSE:688551) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hefei Kewell Power SystemLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = CN¥75m ÷ (CN¥1.5b - CN¥356m) (Based on the trailing twelve months to September 2023).
Therefore, Hefei Kewell Power SystemLtd has an ROCE of 6.8%. On its own that's a low return, but compared to the average of 5.0% generated by the Electronic industry, it's much better.
Check out our latest analysis for Hefei Kewell Power SystemLtd
Above you can see how the current ROCE for Hefei Kewell Power SystemLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hefei Kewell Power SystemLtd.
What Can We Tell From Hefei Kewell Power SystemLtd's ROCE Trend?
Unfortunately, the trend isn't great with ROCE falling from 34% five years ago, while capital employed has grown 848%. Usually this isn't ideal, but given Hefei Kewell Power SystemLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Hefei Kewell Power SystemLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Hefei Kewell Power SystemLtd is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 27% over the last three 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.
If you'd like to know more about Hefei Kewell Power SystemLtd, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.
While Hefei Kewell Power SystemLtd 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.
