Ningbo Haitian Precision MachineryLtd (SHSE:601882) Is Achieving High Returns On Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Ningbo Haitian Precision MachineryLtd (SHSE:601882) looks great, so lets see what the trend can tell us.

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. To calculate this metric for Ningbo Haitian Precision MachineryLtd, this is the formula:

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

0.20 = CN¥549m ÷ (CN¥4.8b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

Thus, Ningbo Haitian Precision MachineryLtd has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 5.3% earned by companies in a similar industry.

View our latest analysis for Ningbo Haitian Precision MachineryLtd

In the above chart we have measured Ningbo Haitian Precision MachineryLtd'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 Ningbo Haitian Precision MachineryLtd for free.

What Can We Tell From Ningbo Haitian Precision MachineryLtd's ROCE Trend?

We like the trends that we're seeing from Ningbo Haitian Precision MachineryLtd. Over the last five years, returns on capital employed have risen substantially to 20%. The amount of capital employed has increased too, by 102%. 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.

On a separate but related note, it's important to know that Ningbo Haitian Precision MachineryLtd has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Ningbo Haitian Precision MachineryLtd's ROCE

All in all, it's terrific to see that Ningbo Haitian Precision MachineryLtd is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for 601882 that compares the share price and estimated value.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.