Ningbo Lehui International Engineering EquipmentLtd's (SHSE:603076) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Having said that, from a first glance at Ningbo Lehui International Engineering EquipmentLtd (SHSE:603076) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Ningbo Lehui International Engineering EquipmentLtd:

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

0.0076 = CN¥11m ÷ (CN¥3.6b - CN¥2.1b) (Based on the trailing twelve months to June 2024).

Thus, Ningbo Lehui International Engineering EquipmentLtd has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

See 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.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 8.3% five years ago, while capital employed has grown 82%. That being said, Ningbo Lehui International Engineering EquipmentLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. 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.

On a side note, Ningbo Lehui International Engineering EquipmentLtd's current liabilities are still rather high at 58% of total assets. 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.

What We Can Learn From Ningbo Lehui International Engineering EquipmentLtd's ROCE

To conclude, we've found that Ningbo Lehui International Engineering EquipmentLtd is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 33% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 3 warning signs for Ningbo Lehui International Engineering EquipmentLtd (1 is a bit unpleasant) you should be aware of.

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.