Returns On Capital At Qingdao Hanhe CableLtd (SZSE:002498) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Qingdao Hanhe CableLtd (SZSE:002498) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Qingdao Hanhe CableLtd:

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

0.072 = CN¥594m ÷ (CN¥12b - CN¥4.1b) (Based on the trailing twelve months to September 2024).

So, Qingdao Hanhe CableLtd has an ROCE of 7.2%. 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.

Check out our latest analysis for Qingdao Hanhe CableLtd

Above you can see how the current ROCE for Qingdao Hanhe CableLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Qingdao Hanhe CableLtd .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Qingdao Hanhe CableLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.2% from 10% five years ago. However it looks like Qingdao Hanhe CableLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 33%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 7.2%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Qingdao Hanhe CableLtd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 20% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing to note, we've identified 1 warning sign with Qingdao Hanhe CableLtd and understanding this should be part of your investment process.

While Qingdao Hanhe CableLtd 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.