Wuxi Hongsheng Heat Exchanger Manufacturing (SHSE:603090) Might Have The Makings Of A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 when we looked at Wuxi Hongsheng Heat Exchanger Manufacturing (SHSE:603090) and its trend of ROCE, we really liked what we saw.

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 Wuxi Hongsheng Heat Exchanger Manufacturing:

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

0.11 = CN¥64m ÷ (CN¥842m - CN¥244m) (Based on the trailing twelve months to March 2024).

Therefore, Wuxi Hongsheng Heat Exchanger Manufacturing has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.6% it's much better.

View 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Wuxi Hongsheng Heat Exchanger Manufacturing.

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. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 106% in that same time. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line

To sum it up, Wuxi Hongsheng Heat Exchanger Manufacturing is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has only returned 35% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to continue researching Wuxi Hongsheng Heat Exchanger Manufacturing, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

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.