Some Investors May Be Worried About Kunshan Huguang Auto HarnessLtd's (SHSE:605333) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Kunshan Huguang Auto HarnessLtd (SHSE:605333), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. The formula for this calculation on Kunshan Huguang Auto HarnessLtd is:

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

0.093 = CN¥237m ÷ (CN¥6.0b - CN¥3.4b) (Based on the trailing twelve months to March 2024).

Thus, Kunshan Huguang Auto HarnessLtd has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 6.9% generated by the Auto Components industry, it's much better.

Check out our latest analysis for Kunshan Huguang Auto HarnessLtd

Above you can see how the current ROCE for Kunshan Huguang Auto HarnessLtd 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 Kunshan Huguang Auto HarnessLtd for free.

So How Is Kunshan Huguang Auto HarnessLtd's ROCE Trending?

We weren't thrilled with the trend because Kunshan Huguang Auto HarnessLtd's ROCE has reduced by 51% over the last five years, while the business employed 315% more capital. That being said, Kunshan Huguang Auto HarnessLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Kunshan Huguang Auto HarnessLtd's earnings and if they change as a result from the capital raise.

Another thing to note, Kunshan Huguang Auto HarnessLtd has a high ratio of current liabilities to total assets of 57%. 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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kunshan Huguang Auto HarnessLtd. And the stock has followed suit returning a meaningful 94% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

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

While Kunshan Huguang Auto HarnessLtd 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.