Returns Are Gaining Momentum At Shandong Hongyu Precision Machinery (SZSE:002890)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Shandong Hongyu Precision Machinery's (SZSE:002890) returns on capital, so let's have a look.

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What Is 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. Analysts use this formula to calculate it for Shandong Hongyu Precision Machinery:

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

0.028 = CN¥17m ÷ (CN¥737m - CN¥134m) (Based on the trailing twelve months to September 2024).

Thus, Shandong Hongyu Precision Machinery has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.3%.

Check out our latest analysis for Shandong Hongyu Precision Machinery

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shandong Hongyu Precision Machinery.

What Does the ROCE Trend For Shandong Hongyu Precision Machinery Tell Us?

Shandong Hongyu Precision Machinery has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 2.8% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Shandong Hongyu Precision Machinery has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

What We Can Learn From Shandong Hongyu Precision Machinery's ROCE

To bring it all together, Shandong Hongyu Precision Machinery has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 7.3% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

If you want to continue researching Shandong Hongyu Precision Machinery, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Shandong Hongyu Precision Machinery 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.