Returns On Capital Are Showing Encouraging Signs At Henan Thinker Automatic EquipmentLtd (SHSE:603508)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Henan Thinker Automatic EquipmentLtd (SHSE:603508) so let's look a bit deeper.

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 Henan Thinker Automatic EquipmentLtd:

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

0.098 = CN¥460m ÷ (CN¥5.0b - CN¥252m) (Based on the trailing twelve months to September 2024).

Thus, Henan Thinker Automatic EquipmentLtd has an ROCE of 9.8%. On its own that's a low return, but compared to the average of 5.2% generated by the Machinery industry, it's much better.

Check out our latest analysis for Henan Thinker Automatic EquipmentLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Henan Thinker Automatic EquipmentLtd's ROCE against it's prior returns. If you'd like to look at how Henan Thinker Automatic EquipmentLtd has performed in the past in other metrics, you can view this free graph of Henan Thinker Automatic EquipmentLtd's past earnings, revenue and cash flow.

What Can We Tell From Henan Thinker Automatic EquipmentLtd's ROCE Trend?

Henan Thinker Automatic EquipmentLtd's ROCE growth is quite impressive. 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 70% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

To sum it up, Henan Thinker Automatic EquipmentLtd is collecting higher returns from the same amount of capital, and that's impressive. 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.

One more thing, we've spotted 1 warning sign facing Henan Thinker Automatic EquipmentLtd that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.