If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at HIT Welding IndustryLtd (SZSE:301137), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for HIT Welding IndustryLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = CN¥31m ÷ (CN¥2.1b - CN¥761m) (Based on the trailing twelve months to September 2023).
So, HIT Welding IndustryLtd has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.0%.
View our latest analysis for HIT Welding IndustryLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for HIT Welding IndustryLtd's ROCE against it's prior returns. If you're interested in investigating HIT Welding IndustryLtd's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at HIT Welding IndustryLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.3% from 14% five years ago. However it looks like HIT Welding IndustryLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
To conclude, we've found that HIT Welding IndustryLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 8.4% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you want to know some of the risks facing HIT Welding IndustryLtd we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
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.
