What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Harbin Boshi Automation's (SZSE:002698) returns on capital, so let's have a 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. The formula for this calculation on Harbin Boshi Automation is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥637m ÷ (CN¥6.6b - CN¥2.4b) (Based on the trailing twelve months to December 2023).
Therefore, Harbin Boshi Automation has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.6% it's much better.
Above you can see how the current ROCE for Harbin Boshi Automation compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Harbin Boshi Automation for free.
What The Trend Of ROCE Can Tell Us
Harbin Boshi Automation is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 15%. 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 91%. So we're very much inspired by what we're seeing at Harbin Boshi Automation thanks to its ability to profitably reinvest capital.
The Bottom Line
To sum it up, Harbin Boshi Automation has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 55% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a final note, we found 2 warning signs for Harbin Boshi Automation (1 is concerning) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
