The Returns On Capital At Dongguan Huali IndustriesLtd (SHSE:603038) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Dongguan Huali IndustriesLtd (SHSE:603038), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Dongguan Huali IndustriesLtd is:

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

0.02 = CN¥34m ÷ (CN¥1.9b - CN¥180m) (Based on the trailing twelve months to September 2024).

Thus, Dongguan Huali IndustriesLtd has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 9.6%.

View our latest analysis for Dongguan Huali IndustriesLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dongguan Huali IndustriesLtd's ROCE against it's prior returns. If you'd like to look at how Dongguan Huali IndustriesLtd has performed in the past in other metrics, you can view this free graph of Dongguan Huali IndustriesLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

We weren't thrilled with the trend because Dongguan Huali IndustriesLtd's ROCE has reduced by 72% over the last five years, while the business employed 56% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Dongguan Huali IndustriesLtd might not have received a full period of earnings contribution from it.

The Key Takeaway

While returns have fallen for Dongguan Huali IndustriesLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 154% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Dongguan Huali IndustriesLtd does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

While Dongguan Huali IndustriesLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.