Dalian Huarui Heavy Industry Group (SZSE:002204) Has Some Way To Go To Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. In light of that, when we looked at Dalian Huarui Heavy Industry Group (SZSE:002204) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Dalian Huarui Heavy Industry Group, this is the formula:

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

0.035 = CN¥311m ÷ (CN¥23b - CN¥14b) (Based on the trailing twelve months to September 2023).

Thus, Dalian Huarui Heavy Industry Group has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.0%.

View our latest analysis for Dalian Huarui Heavy Industry Group

In the above chart we have measured Dalian Huarui Heavy Industry Group'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 Dalian Huarui Heavy Industry Group .

So How Is Dalian Huarui Heavy Industry Group's ROCE Trending?

The returns on capital haven't changed much for Dalian Huarui Heavy Industry Group in recent years. Over the past five years, ROCE has remained relatively flat at around 3.5% and the business has deployed 32% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Dalian Huarui Heavy Industry Group's current liabilities are still rather high at 61% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Dalian Huarui Heavy Industry Group's ROCE

As we've seen above, Dalian Huarui Heavy Industry Group's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 11% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 2 warning signs for Dalian Huarui Heavy Industry Group (1 doesn't sit too well with us) 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.