Returns on Capital Paint A Bright Future For Kunshan Huguang Auto HarnessLtd (SHSE:605333)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Kunshan Huguang Auto HarnessLtd (SHSE:605333) we really liked what we saw.

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 Kunshan Huguang Auto HarnessLtd, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.24 = CN¥673m ÷ (CN¥6.9b - CN¥4.1b) (Based on the trailing twelve months to September 2024).

Thus, Kunshan Huguang Auto HarnessLtd has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 7.0%.

Check out our latest analysis for Kunshan Huguang Auto HarnessLtd

In the above chart we have measured Kunshan Huguang Auto HarnessLtd'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 Kunshan Huguang Auto HarnessLtd .

The Trend Of ROCE

Investors would be pleased with what's happening at Kunshan Huguang Auto HarnessLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 24%. Basically the business is earning more per dollar of capital invested and in addition to that, 334% more capital is being employed now too. 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.

On a side note, Kunshan Huguang Auto HarnessLtd's current liabilities are still rather high at 60% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Kunshan Huguang Auto HarnessLtd's ROCE

In summary, it's great to see that Kunshan Huguang Auto HarnessLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 71% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Kunshan Huguang Auto HarnessLtd can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Kunshan Huguang Auto HarnessLtd that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.