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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shanghai Hugong Electric GroupLtd (SHSE:603131), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
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 Shanghai Hugong Electric GroupLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = CN¥40m ÷ (CN¥2.2b - CN¥534m) (Based on the trailing twelve months to June 2024).
Thus, Shanghai Hugong Electric GroupLtd has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shanghai Hugong Electric GroupLtd's ROCE against it's prior returns. If you'd like to look at how Shanghai Hugong Electric GroupLtd has performed in the past in other metrics, you can view this free graph of Shanghai Hugong Electric GroupLtd's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of Shanghai Hugong Electric GroupLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.2% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Shanghai Hugong Electric GroupLtd's ROCE
While returns have fallen for Shanghai Hugong Electric GroupLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 3.0% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
On a final note, we found 2 warning signs for Shanghai Hugong Electric GroupLtd (1 doesn't sit too well with us) you should be aware of.
While Shanghai Hugong Electric GroupLtd 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.
