Returns On Capital Are Showing Encouraging Signs At Wuxi Huaguang Environment & Energy GroupLtd (SHSE:600475)

There are a few key trends to look for if we want to identify the next 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. 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 Wuxi Huaguang Environment & Energy GroupLtd (SHSE:600475) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Wuxi Huaguang Environment & Energy GroupLtd:

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

0.038 = CN¥640m ÷ (CN¥26b - CN¥9.8b) (Based on the trailing twelve months to September 2024).

Thus, Wuxi Huaguang Environment & Energy GroupLtd has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

See our latest analysis for Wuxi Huaguang Environment & Energy GroupLtd

In the above chart we have measured Wuxi Huaguang Environment & Energy GroupLtd'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 Wuxi Huaguang Environment & Energy GroupLtd for free.

What Does the ROCE Trend For Wuxi Huaguang Environment & Energy GroupLtd Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 3.8%. The amount of capital employed has increased too, by 165%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Wuxi Huaguang Environment & Energy GroupLtd has decreased current liabilities to 37% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Wuxi Huaguang Environment & Energy GroupLtd's ROCE

To sum it up, Wuxi Huaguang Environment & Energy GroupLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 86% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Wuxi Huaguang Environment & Energy GroupLtd we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

While Wuxi Huaguang Environment & Energy GroupLtd 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.