The Return Trends At Wuxi Hongsheng Heat Exchanger Manufacturing (SHSE:603090) Look Promising

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Wuxi Hongsheng Heat Exchanger Manufacturing is:

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

0.097 = CN¥58m ÷ (CN¥835m - CN¥244m) (Based on the trailing twelve months to June 2024).

Thus, Wuxi Hongsheng Heat Exchanger Manufacturing has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.5%.

Check out our latest analysis for Wuxi Hongsheng Heat Exchanger Manufacturing

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'd like to look at how Wuxi Hongsheng Heat Exchanger Manufacturing has performed in the past in other metrics, you can view this free graph of Wuxi Hongsheng Heat Exchanger Manufacturing's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Wuxi Hongsheng Heat Exchanger Manufacturing has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 64% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

To bring it all together, Wuxi Hongsheng Heat Exchanger Manufacturing has done well to increase the returns it's generating from its capital employed. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 2 warning signs for Wuxi Hongsheng Heat Exchanger Manufacturing that we think you should be aware of.

While Wuxi Hongsheng Heat Exchanger Manufacturing 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.