Inner Mongolia North Hauler (SHSE:600262) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Inner Mongolia North Hauler (SHSE:600262) so let's look a bit deeper.

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. The formula for this calculation on Inner Mongolia North Hauler is:

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

0.096 = CN¥180m ÷ (CN¥3.8b - CN¥1.9b) (Based on the trailing twelve months to June 2024).

Therefore, Inner Mongolia North Hauler has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.5%.

View our latest analysis for Inner Mongolia North Hauler

Historical performance is a great place to start when researching a stock so above you can see the gauge for Inner Mongolia North Hauler's ROCE against it's prior returns. If you're interested in investigating Inner Mongolia North Hauler's past further, check out this free graph covering Inner Mongolia North Hauler's past earnings, revenue and cash flow.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 9.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 49% 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.

On a separate but related note, it's important to know that Inner Mongolia North Hauler has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To sum it up, Inner Mongolia North Hauler has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 2.4% 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.

One final note, you should learn about the 3 warning signs we've spotted with Inner Mongolia North Hauler (including 2 which are a bit unpleasant) .

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.