Harbin Electric Corporation Jiamusi Electric MachineLtd (SZSE:000922) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Harbin Electric Corporation Jiamusi Electric MachineLtd (SZSE:000922), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. To calculate this metric for Harbin Electric Corporation Jiamusi Electric MachineLtd, this is the formula:

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

0.10 = CN¥399m ÷ (CN¥9.6b - CN¥5.8b) (Based on the trailing twelve months to September 2024).

Thus, Harbin Electric Corporation Jiamusi Electric MachineLtd has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 5.9% it's much better.

See our latest analysis for Harbin Electric Corporation Jiamusi Electric MachineLtd

Above you can see how the current ROCE for Harbin Electric Corporation Jiamusi Electric MachineLtd 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 Harbin Electric Corporation Jiamusi Electric MachineLtd .

What Does the ROCE Trend For Harbin Electric Corporation Jiamusi Electric MachineLtd Tell Us?

We weren't thrilled with the trend because Harbin Electric Corporation Jiamusi Electric MachineLtd's ROCE has reduced by 44% over the last five years, while the business employed 65% more capital. Usually this isn't ideal, but given Harbin Electric Corporation Jiamusi Electric MachineLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Harbin Electric Corporation Jiamusi Electric MachineLtd might not have received a full period of earnings contribution from it.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 60%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 10%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Harbin Electric Corporation Jiamusi Electric MachineLtd's ROCE

In summary, Harbin Electric Corporation Jiamusi Electric MachineLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 86% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to continue researching Harbin Electric Corporation Jiamusi Electric MachineLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Harbin Electric Corporation Jiamusi Electric MachineLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.