Henan Pinggao ElectricLtd's (SHSE:600312) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Henan Pinggao ElectricLtd's (SHSE:600312) returns on capital, so let's have a look.

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. To calculate this metric for Henan Pinggao ElectricLtd, this is the formula:

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

0.12 = CN¥1.3b ÷ (CN¥21b - CN¥10b) (Based on the trailing twelve months to September 2024).

Therefore, Henan Pinggao ElectricLtd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 5.8% it's much better.

See our latest analysis for Henan Pinggao ElectricLtd

In the above chart we have measured Henan Pinggao ElectricLtd'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 Henan Pinggao ElectricLtd for free.

The Trend Of ROCE

Henan Pinggao ElectricLtd is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 83% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 48%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Henan Pinggao ElectricLtd's ROCE

In summary, we're delighted to see that Henan Pinggao ElectricLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 172% 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 more thing to note, we've identified 1 warning sign with Henan Pinggao ElectricLtd and understanding it should be part of your investment process.

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.