The Return Trends At Henan Senyuan Electric (SZSE:002358) Look Promising

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Henan Senyuan Electric (SZSE:002358) so let's look a bit deeper.

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. To calculate this metric for Henan Senyuan Electric, this is the formula:

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

0.077 = CN¥257m ÷ (CN¥6.5b - CN¥3.2b) (Based on the trailing twelve months to September 2024).

So, Henan Senyuan Electric has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 5.8% generated by the Electrical industry, it's much better.

View our latest analysis for Henan Senyuan Electric

Historical performance is a great place to start when researching a stock so above you can see the gauge for Henan Senyuan Electric's ROCE against it's prior returns. If you're interested in investigating Henan Senyuan Electric's past further, check out this free graph covering Henan Senyuan Electric's past earnings, revenue and cash flow.

What Does the ROCE Trend For Henan Senyuan Electric Tell Us?

We're pretty happy with how the ROCE has been trending at Henan Senyuan Electric. The data shows that returns on capital have increased by 401% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 35% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a separate but related note, it's important to know that Henan Senyuan Electric has a current liabilities to total assets ratio of 49%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, it's great to see that Henan Senyuan Electric has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 40% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 1 warning sign for Henan Senyuan Electric you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.