Ningbo Huaxiang Electronic's (SZSE:002048) Returns Have Hit A Wall

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So, when we ran our eye over Ningbo Huaxiang Electronic's (SZSE:002048) trend of ROCE, we liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Ningbo Huaxiang Electronic, this is the formula:

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

0.11 = CN¥1.8b ÷ (CN¥26b - CN¥10b) (Based on the trailing twelve months to December 2023).

Therefore, Ningbo Huaxiang Electronic has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 6.6% it's much better.

Check out our latest analysis for Ningbo Huaxiang Electronic

Above you can see how the current ROCE for Ningbo Huaxiang Electronic 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 Ningbo Huaxiang Electronic for free.

What Does the ROCE Trend For Ningbo Huaxiang Electronic Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 54% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that Ningbo Huaxiang Electronic has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Ningbo Huaxiang Electronic's ROCE

To sum it up, Ningbo Huaxiang Electronic has simply been reinvesting capital steadily, at those decent rates of return. However, over the last five years, the stock has only delivered a 18% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you want to continue researching Ningbo Huaxiang Electronic, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Ningbo Huaxiang Electronic may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.