Why The 24% Return On Capital At Shanghai Hanbell Precise Machinery (SZSE:002158) Should Have Your Attention

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at the ROCE trend of Shanghai Hanbell Precise Machinery (SZSE:002158) we really liked what we saw.

Understanding 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 Shanghai Hanbell Precise Machinery, this is the formula:

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

0.24 = CN¥979m ÷ (CN¥6.6b - CN¥2.5b) (Based on the trailing twelve months to March 2024).

So, Shanghai Hanbell Precise Machinery has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Machinery industry average of 5.9%.

See our latest analysis for Shanghai Hanbell Precise Machinery

In the above chart we have measured Shanghai Hanbell Precise Machinery'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 Shanghai Hanbell Precise Machinery .

What Can We Tell From Shanghai Hanbell Precise Machinery's ROCE Trend?

We like the trends that we're seeing from Shanghai Hanbell Precise Machinery. Over the last five years, returns on capital employed have risen substantially to 24%. Basically the business is earning more per dollar of capital invested and in addition to that, 89% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

In summary, it's great to see that Shanghai Hanbell Precise Machinery 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. Since the stock has returned a staggering 134% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Shanghai Hanbell Precise Machinery does have some risks though, and we've spotted 1 warning sign for Shanghai Hanbell Precise Machinery that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.