Huaiji Dengyun Auto-parts (Holding)Ltd (SZSE:002715) Is Doing The Right Things To Multiply Its Share Price

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Huaiji Dengyun Auto-parts (Holding)Ltd (SZSE:002715) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Huaiji Dengyun Auto-parts (Holding)Ltd is:

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

0.085 = CN¥57m ÷ (CN¥1.0b - CN¥368m) (Based on the trailing twelve months to June 2024).

Thus, Huaiji Dengyun Auto-parts (Holding)Ltd has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Auto Components industry average of 7.2%.

See our latest analysis for Huaiji Dengyun Auto-parts (Holding)Ltd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huaiji Dengyun Auto-parts (Holding)Ltd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Huaiji Dengyun Auto-parts (Holding)Ltd.

What Can We Tell From Huaiji Dengyun Auto-parts (Holding)Ltd's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 8.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 36% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Huaiji Dengyun Auto-parts (Holding)Ltd's ROCE

In summary, it's great to see that Huaiji Dengyun Auto-parts (Holding)Ltd 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 only returned 6.0% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to continue researching Huaiji Dengyun Auto-parts (Holding)Ltd, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.