Investors Will Want Hangzhou Advance Gearbox Group's (SHSE:601177) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Hangzhou Advance Gearbox Group (SHSE:601177) and its trend of ROCE, we really liked what we saw.

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

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. The formula for this calculation on Hangzhou Advance Gearbox Group is:

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

0.015 = CN¥48m ÷ (CN¥5.0b - CN¥1.7b) (Based on the trailing twelve months to September 2024).

Thus, Hangzhou Advance Gearbox Group has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.3%.

See our latest analysis for Hangzhou Advance Gearbox Group

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

The Trend Of ROCE

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 1.5%. The amount of capital employed has increased too, by 65%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Hangzhou Advance Gearbox Group has decreased current liabilities to 34% 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.

The Bottom Line

To sum it up, Hangzhou Advance Gearbox Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 185% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Hangzhou Advance Gearbox Group can keep these trends up, it could have a bright future ahead.

If you want to continue researching Hangzhou Advance Gearbox Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Hangzhou Advance Gearbox Group 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.