Huizhou Desay SV Automotive (SZSE:002920) Might Have The Makings Of A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Huizhou Desay SV Automotive (SZSE:002920) looks quite promising in regards to its trends of return on capital.

Understanding 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 Huizhou Desay SV Automotive is:

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

0.19 = CN¥1.8b ÷ (CN¥17b - CN¥7.7b) (Based on the trailing twelve months to June 2024).

So, Huizhou Desay SV Automotive has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 7.7% it's much better.

View our latest analysis for Huizhou Desay SV Automotive

Above you can see how the current ROCE for Huizhou Desay SV Automotive 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 Huizhou Desay SV Automotive for free.

The Trend Of ROCE

We like the trends that we're seeing from Huizhou Desay SV Automotive. Over the last five years, returns on capital employed have risen substantially to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 122%. So we're very much inspired by what we're seeing at Huizhou Desay SV Automotive thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 44% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In summary, it's great to see that Huizhou Desay SV Automotive 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 staggering 254% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 3 warning signs we've spotted with Huizhou Desay SV Automotive (including 1 which is potentially serious) .

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.