Why You Should Care About Himile Mechanical Science and Technology (Shandong)'s (SZSE:002595) Strong Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. That's why when we briefly looked at Himile Mechanical Science and Technology (Shandong)'s (SZSE:002595) ROCE trend, we were very happy with what we saw.

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. Analysts use this formula to calculate it for Himile Mechanical Science and Technology (Shandong):

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

0.20 = CN¥1.8b ÷ (CN¥10b - CN¥1.3b) (Based on the trailing twelve months to March 2024).

Therefore, Himile Mechanical Science and Technology (Shandong) has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Machinery industry average of 5.6%.

Check out our latest analysis for Himile Mechanical Science and Technology (Shandong)

Above you can see how the current ROCE for Himile Mechanical Science and Technology (Shandong) 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 Himile Mechanical Science and Technology (Shandong) for free.

So How Is Himile Mechanical Science and Technology (Shandong)'s ROCE Trending?

We'd be pretty happy with returns on capital like Himile Mechanical Science and Technology (Shandong). The company has employed 102% more capital in the last five years, and the returns on that capital have remained stable at 20%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

The Bottom Line

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 103% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing, we've spotted 1 warning sign facing Himile Mechanical Science and Technology (Shandong) that you might find interesting.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.