Slowing Rates Of Return At Ningbo Huaxiang Electronic (SZSE:002048) Leave Little Room For Excitement

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Ningbo Huaxiang Electronic (SZSE:002048) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. 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)

0.099 = CN¥1.5b ÷ (CN¥28b - CN¥13b) (Based on the trailing twelve months to September 2024).

Thus, Ningbo Huaxiang Electronic has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 7.0%.

Check out our latest analysis for Ningbo Huaxiang Electronic

In the above chart we have measured Ningbo Huaxiang Electronic's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Ningbo Huaxiang Electronic .

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

There are better returns on capital out there than what we're seeing at Ningbo Huaxiang Electronic. The company has consistently earned 9.9% for the last five years, and the capital employed within the business has risen 37% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 47% of total assets, this reported ROCE would probably be less than9.9% because total capital employed would be higher.The 9.9% ROCE could be even lower if current liabilities weren't 47% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

Our Take On Ningbo Huaxiang Electronic's ROCE

Long story short, while Ningbo Huaxiang Electronic has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 1 warning sign for Ningbo Huaxiang Electronic that we think you should be aware of.

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.