Harbin Air ConditioningLtd (SHSE:600202) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Harbin Air ConditioningLtd (SHSE:600202) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Harbin Air ConditioningLtd is:

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

0.067 = CN¥69m ÷ (CN¥2.8b - CN¥1.8b) (Based on the trailing twelve months to June 2024).

Therefore, Harbin Air ConditioningLtd has an ROCE of 6.7%. In absolute terms, that's a low return but it's around the Building industry average of 7.5%.

See our latest analysis for Harbin Air ConditioningLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Harbin Air ConditioningLtd'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 Harbin Air ConditioningLtd.

What Can We Tell From Harbin Air ConditioningLtd's ROCE Trend?

When we looked at the ROCE trend at Harbin Air ConditioningLtd, we didn't gain much confidence. Around five years ago the returns on capital were 9.9%, but since then they've fallen to 6.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Harbin Air ConditioningLtd's current liabilities have increased over the last five years to 63% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.7%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Harbin Air ConditioningLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Harbin Air ConditioningLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 3.8% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Harbin Air ConditioningLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Harbin Air ConditioningLtd 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.