Returns On Capital Signal Tricky Times Ahead For Hunan Valin Wire & CableLtd (SZSE:001208)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Hunan Valin Wire & CableLtd (SZSE:001208), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Hunan Valin Wire & CableLtd:

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

0.049 = CN¥94m ÷ (CN¥4.0b - CN¥2.0b) (Based on the trailing twelve months to December 2023).

Thus, Hunan Valin Wire & CableLtd has an ROCE of 4.9%. In absolute terms, that's a low return but it's around the Electrical industry average of 6.0%.

See our latest analysis for Hunan Valin Wire & CableLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hunan Valin Wire & CableLtd's ROCE against it's prior returns. If you'd like to look at how Hunan Valin Wire & CableLtd has performed in the past in other metrics, you can view this free graph of Hunan Valin Wire & CableLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 17% five years ago, while the business's capital employed increased by 278%. Usually this isn't ideal, but given Hunan Valin Wire & CableLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hunan Valin Wire & CableLtd's earnings and if they change as a result from the capital raise. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

On a side note, Hunan Valin Wire & CableLtd's current liabilities are still rather high at 51% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Hunan Valin Wire & CableLtd's ROCE

While returns have fallen for Hunan Valin Wire & CableLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 33% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Hunan Valin Wire & CableLtd that we think you should be aware of.

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.

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