Huizhou Desay SV Automotive's (SZSE:002920) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. With that in mind, we've noticed some promising trends at Huizhou Desay SV Automotive (SZSE:002920) so let's look a bit deeper.

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

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. To calculate this metric for Huizhou Desay SV Automotive, this is the formula:

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

0.17 = CN¥1.6b ÷ (CN¥18b - CN¥8.8b) (Based on the trailing twelve months to March 2024).

So, Huizhou Desay SV Automotive has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 6.9% it's much better.

Check out our latest analysis for Huizhou Desay SV Automotive

In the above chart we have measured Huizhou Desay SV Automotive's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Huizhou Desay SV Automotive for free.

What Can We Tell From Huizhou Desay SV Automotive's ROCE Trend?

Huizhou Desay SV Automotive is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The amount of capital employed has increased too, by 120%. So we're very much inspired by what we're seeing at Huizhou Desay SV Automotive thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 48% 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 On Huizhou Desay SV Automotive's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Huizhou Desay SV Automotive has. Since the stock has returned a staggering 358% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Huizhou Desay SV Automotive can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 2 warning signs with Huizhou Desay SV Automotive (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

While Huizhou Desay SV Automotive 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.