Investors Will Want Harbin Boshi Automation's (SZSE:002698) Growth In ROCE To Persist

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 Harbin Boshi Automation (SZSE:002698) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Harbin Boshi Automation, this is the formula:

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

0.15 = CN¥637m ÷ (CN¥6.6b - CN¥2.4b) (Based on the trailing twelve months to December 2023).

So, Harbin Boshi Automation has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Machinery industry.

See our latest analysis for Harbin Boshi Automation

Above you can see how the current ROCE for Harbin Boshi Automation 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 Harbin Boshi Automation for free.

What Can We Tell From Harbin Boshi Automation's ROCE Trend?

The trends we've noticed at Harbin Boshi Automation are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. The amount of capital employed has increased too, by 91%. So we're very much inspired by what we're seeing at Harbin Boshi Automation thanks to its ability to profitably reinvest capital.

In Conclusion...

In summary, it's great to see that Harbin Boshi Automation can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 42% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Harbin Boshi Automation (of which 1 is potentially serious!) that you should know about.

While Harbin Boshi Automation 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.

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