Returns On Capital Are Showing Encouraging Signs At Huaming Power EquipmentLtd (SZSE:002270)

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Huaming Power EquipmentLtd (SZSE:002270) and its trend of ROCE, we really liked what we saw.

Understanding 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 Huaming Power EquipmentLtd is:

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

0.19 = CN¥628m ÷ (CN¥4.4b - CN¥1.0b) (Based on the trailing twelve months to September 2024).

So, Huaming Power EquipmentLtd has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Machinery industry.

View our latest analysis for Huaming Power EquipmentLtd

Above you can see how the current ROCE for Huaming Power EquipmentLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Huaming Power EquipmentLtd for free.

So How Is Huaming Power EquipmentLtd's ROCE Trending?

Huaming Power EquipmentLtd has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 172% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Our Take On Huaming Power EquipmentLtd's ROCE

To sum it up, Huaming Power EquipmentLtd is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 353% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing Huaming Power EquipmentLtd that you might find interesting.

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.