Investors Could Be Concerned With Harbin Electric Corporation Jiamusi Electric MachineLtd's (SZSE:000922) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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)

0.11 = CN¥356m ÷ (CN¥6.2b - CN¥3.0b) (Based on the trailing twelve months to September 2023).

Therefore, Harbin Electric Corporation Jiamusi Electric MachineLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Electrical industry.

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're interested, you can view the analysts predictions in our free analyst report for Harbin Electric Corporation Jiamusi Electric MachineLtd .

What The Trend Of ROCE Can Tell Us

In terms of Harbin Electric Corporation Jiamusi Electric MachineLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 16% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Harbin Electric Corporation Jiamusi Electric MachineLtd's current liabilities have increased over the last five years to 47% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. 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...

While returns have fallen for Harbin Electric Corporation Jiamusi Electric MachineLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 14% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 2 warning signs for Harbin Electric Corporation Jiamusi Electric MachineLtd (1 is potentially serious) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.