The Return Trends At Dalian Huarui Heavy Industry Group (SZSE:002204) Look Promising

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Dalian Huarui Heavy Industry Group (SZSE:002204) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Dalian Huarui Heavy Industry Group is:

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

0.041 = CN¥371m ÷ (CN¥25b - CN¥16b) (Based on the trailing twelve months to September 2024).

So, Dalian Huarui Heavy Industry Group has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

Check out our latest analysis for Dalian Huarui Heavy Industry Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Dalian Huarui Heavy Industry Group.

What Can We Tell From Dalian Huarui Heavy Industry Group's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 4.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 30%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that Dalian Huarui Heavy Industry Group has a current liabilities to total assets ratio of 64%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

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

All in all, it's terrific to see that Dalian Huarui Heavy Industry Group is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 63% return over the last five years. In light of that, we think it's worth looking further into this stock because if Dalian Huarui Heavy Industry Group can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Dalian Huarui Heavy Industry Group you'll probably want to know about.

While Dalian Huarui Heavy Industry Group 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.