Here's What's Concerning About Harbin Electric Corporation Jiamusi Electric MachineLtd's (SZSE:000922) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Harbin Electric Corporation Jiamusi Electric MachineLtd (SZSE:000922), it didn't seem to tick all of these boxes.

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

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. 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).

So, 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 5.8% it's much better.

View our latest analysis for Harbin Electric Corporation Jiamusi Electric MachineLtd

In the above chart we have measured Harbin Electric Corporation Jiamusi Electric MachineLtd'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 Harbin Electric Corporation Jiamusi Electric MachineLtd .

What Can We Tell From Harbin Electric Corporation Jiamusi Electric MachineLtd's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 19% five years ago, while the business's capital employed increased by 65%. 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. Harbin Electric Corporation Jiamusi Electric MachineLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

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%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

In Conclusion...

To conclude, we've found that Harbin Electric Corporation Jiamusi Electric MachineLtd is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 119% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 2 warning signs with Harbin Electric Corporation Jiamusi Electric MachineLtd and understanding them should be part of your investment process.

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.