Wuhan Xianglong Power IndustryLtd's (SHSE:600769) 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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Wuhan Xianglong Power IndustryLtd (SHSE:600769) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Wuhan Xianglong Power IndustryLtd, this is the formula:

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

0.15 = CN¥14m ÷ (CN¥281m - CN¥190m) (Based on the trailing twelve months to September 2023).

Thus, Wuhan Xianglong Power IndustryLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 7.0% it's much better.

View our latest analysis for Wuhan Xianglong Power IndustryLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Wuhan Xianglong Power IndustryLtd's past further, check out this free graph covering Wuhan Xianglong Power IndustryLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

The fact that Wuhan Xianglong Power IndustryLtd is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 15% on its capital. In addition to that, Wuhan Xianglong Power IndustryLtd is employing 80% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Another thing to note, Wuhan Xianglong Power IndustryLtd has a high ratio of current liabilities to total assets of 68%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Wuhan Xianglong Power IndustryLtd's ROCE

Long story short, we're delighted to see that Wuhan Xianglong Power IndustryLtd's reinvestment activities have paid off and the company is now profitable. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 54% return over the last five years. In light of that, we think it's worth looking further into this stock because if Wuhan Xianglong Power IndustryLtd can keep these trends up, it could have a bright future ahead.

Wuhan Xianglong Power IndustryLtd does have some risks though, and we've spotted 1 warning sign for Wuhan Xianglong Power IndustryLtd that you might be interested in.

While Wuhan Xianglong Power IndustryLtd 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.