Jiangsu Hengli HydraulicLtd (SHSE:601100) Hasn't Managed To Accelerate Its Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Jiangsu Hengli HydraulicLtd's (SHSE:601100) trend of ROCE, we liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jiangsu Hengli HydraulicLtd, this is the formula:

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

0.15 = CN¥2.1b ÷ (CN¥18b - CN¥3.7b) (Based on the trailing twelve months to September 2023).

Therefore, Jiangsu Hengli HydraulicLtd has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.0% generated by the Machinery industry.

See our latest analysis for Jiangsu Hengli HydraulicLtd

In the above chart we have measured Jiangsu Hengli HydraulicLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Jiangsu Hengli HydraulicLtd .

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 178% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Jiangsu Hengli HydraulicLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

In the end, Jiangsu Hengli HydraulicLtd has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 162% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you'd like to know more about Jiangsu Hengli HydraulicLtd, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While Jiangsu Hengli HydraulicLtd 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.