Hebei Huatong Wires and Cables Group (SHSE:605196) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Hebei Huatong Wires and Cables Group's (SHSE:605196) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Hebei Huatong Wires and Cables Group is:

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

0.15 = CN¥459m ÷ (CN¥5.8b - CN¥2.8b) (Based on the trailing twelve months to September 2023).

Thus, Hebei Huatong Wires and Cables Group has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Electrical industry.

Check out our latest analysis for Hebei Huatong Wires and Cables Group

Above you can see how the current ROCE for Hebei Huatong Wires and Cables Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hebei Huatong Wires and Cables Group .

What Does the ROCE Trend For Hebei Huatong Wires and Cables Group Tell Us?

Investors would be pleased with what's happening at Hebei Huatong Wires and Cables Group. Over the last five years, returns on capital employed have risen substantially to 15%. The amount of capital employed has increased too, by 105%. So we're very much inspired by what we're seeing at Hebei Huatong Wires and Cables Group thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 48% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Hebei Huatong Wires and Cables Group's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Hebei Huatong Wires and Cables Group has. Investors may not be impressed by the favorable underlying trends yet because over the last three years the stock has only returned 12% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 605196 on our platform that is definitely worth checking out.

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.