Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Shanghai Hanbell Precise Machinery (SZSE:002158) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Shanghai Hanbell Precise Machinery, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = CN¥1.0b ÷ (CN¥5.9b - CN¥2.3b) (Based on the trailing twelve months to December 2023).
So, Shanghai Hanbell Precise Machinery has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 6.0% earned by companies in a similar industry.
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 to see what analysts are forecasting going forward, you should check out our free analyst report for Shanghai Hanbell Precise Machinery .
What Can We Tell From Shanghai Hanbell Precise Machinery's ROCE Trend?
We like the trends that we're seeing from Shanghai Hanbell Precise Machinery. Over the last five years, returns on capital employed have risen substantially to 29%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 65%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In Conclusion...
All in all, it's terrific to see that Shanghai Hanbell Precise Machinery is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing, we've spotted 1 warning sign facing Shanghai Hanbell Precise Machinery that you might find interesting.
Shanghai Hanbell Precise Machinery is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.