Returns Are Gaining Momentum At Wuxi Hongsheng Heat Exchanger Manufacturing (SHSE:603090)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 on that note, Wuxi Hongsheng Heat Exchanger Manufacturing (SHSE:603090) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Wuxi Hongsheng Heat Exchanger Manufacturing:

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

0.099 = CN¥60m ÷ (CN¥839m - CN¥231m) (Based on the trailing twelve months to September 2024).

Thus, Wuxi Hongsheng Heat Exchanger Manufacturing has an ROCE of 9.9%. On its own that's a low return, but compared to the average of 5.3% generated by the Machinery industry, it's much better.

Check out our latest analysis for Wuxi Hongsheng Heat Exchanger Manufacturing

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

What Can We Tell From Wuxi Hongsheng Heat Exchanger Manufacturing's ROCE Trend?

Wuxi Hongsheng Heat Exchanger Manufacturing is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 25% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

In summary, we're delighted to see that Wuxi Hongsheng Heat Exchanger Manufacturing has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 41% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Wuxi Hongsheng Heat Exchanger Manufacturing, we've discovered 2 warning signs that you should be aware of.

While Wuxi Hongsheng Heat Exchanger Manufacturing 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.