NINGBO HENGSHUAI (SZSE:300969) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at NINGBO HENGSHUAI (SZSE:300969) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for NINGBO HENGSHUAI, this is the formula:

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

0.18 = CN¥230m ÷ (CN¥1.5b - CN¥228m) (Based on the trailing twelve months to September 2024).

So, NINGBO HENGSHUAI has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Auto Components industry.

See our latest analysis for NINGBO HENGSHUAI

Above you can see how the current ROCE for NINGBO HENGSHUAI compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for NINGBO HENGSHUAI .

How Are Returns Trending?

When we looked at the ROCE trend at NINGBO HENGSHUAI, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 18% from 28% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that NINGBO HENGSHUAI is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 13% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

NINGBO HENGSHUAI does have some risks though, and we've spotted 1 warning sign for NINGBO HENGSHUAI that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.