Investors Will Want Hebei Huatong Wires and Cables Group's (SHSE:605196) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

What Is 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. Analysts use this formula to calculate it for Hebei Huatong Wires and Cables Group:

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

0.13 = CN¥492m ÷ (CN¥6.6b - CN¥2.7b) (Based on the trailing twelve months to September 2024).

Therefore, Hebei Huatong Wires and Cables Group has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.8% generated by the Electrical industry.

See our latest analysis for Hebei Huatong Wires and Cables Group

In the above chart we have measured Hebei Huatong Wires and Cables Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hebei Huatong Wires and Cables Group .

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Hebei Huatong Wires and Cables Group. The data shows that returns on capital have increased substantially over the last five years to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 126% more capital is being employed now too. 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.

Another thing to note, Hebei Huatong Wires and Cables Group has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, it's great to see that Hebei Huatong Wires and Cables Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Considering the stock has delivered 9.6% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Hebei Huatong Wires and Cables Group does have some risks, we noticed 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

While Hebei Huatong Wires and Cables Group 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.