The Trend Of High Returns At Ningbo Haitian Precision MachineryLtd (SHSE:601882) Has Us Very Interested

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Ningbo Haitian Precision MachineryLtd's (SHSE:601882) returns on capital, so let's have a look.

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 Ningbo Haitian Precision MachineryLtd is:

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

0.25 = CN¥601m ÷ (CN¥4.6b - CN¥2.2b) (Based on the trailing twelve months to September 2023).

Thus, Ningbo Haitian Precision MachineryLtd has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 6.0% earned by companies in a similar industry.

See our latest analysis for Ningbo Haitian Precision MachineryLtd

Above you can see how the current ROCE for Ningbo Haitian Precision MachineryLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ningbo Haitian Precision MachineryLtd for free.

So How Is Ningbo Haitian Precision MachineryLtd's ROCE Trending?

The trends we've noticed at Ningbo Haitian Precision MachineryLtd are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 25%. Basically the business is earning more per dollar of capital invested and in addition to that, 82% more capital is being employed now too. So we're very much inspired by what we're seeing at Ningbo Haitian Precision MachineryLtd thanks to its ability to profitably reinvest capital.

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 47%, 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.

In Conclusion...

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.

One more thing: We've identified 2 warning signs with Ningbo Haitian Precision MachineryLtd (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.