Ningbo Lehui International Engineering EquipmentLtd (SHSE:603076) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after briefly looking over the numbers, we don't think Ningbo Lehui International Engineering EquipmentLtd (SHSE:603076) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Ningbo Lehui International Engineering EquipmentLtd is:

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

0.029 = CN¥43m ÷ (CN¥3.6b - CN¥2.1b) (Based on the trailing twelve months to September 2023).

Thus, Ningbo Lehui International Engineering EquipmentLtd has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.1%.

View our latest analysis for Ningbo Lehui International Engineering EquipmentLtd

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ningbo Lehui International Engineering EquipmentLtd.

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 9.6% five years ago, while capital employed has grown 84%. Usually this isn't ideal, but given Ningbo Lehui International Engineering EquipmentLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Ningbo Lehui International Engineering EquipmentLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Another thing to note, Ningbo Lehui International Engineering EquipmentLtd has a high ratio of current liabilities to total assets of 59%. 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.

The Bottom Line

While returns have fallen for Ningbo Lehui International Engineering EquipmentLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 8.3% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing: We've identified 3 warning signs with Ningbo Lehui International Engineering EquipmentLtd (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While Ningbo Lehui International Engineering EquipmentLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.