Hangzhou Heatwell Electric Heating Technology (SHSE:603075) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Hangzhou Heatwell Electric Heating Technology (SHSE:603075) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 Hangzhou Heatwell Electric Heating Technology is:

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

0.14 = CN¥281m ÷ (CN¥2.8b - CN¥819m) (Based on the trailing twelve months to June 2024).

So, Hangzhou Heatwell Electric Heating Technology has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 8.8% it's much better.

Check out our latest analysis for Hangzhou Heatwell Electric Heating Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Heatwell Electric Heating Technology's ROCE against it's prior returns. If you're interested in investigating Hangzhou Heatwell Electric Heating Technology's past further, check out this free graph covering Hangzhou Heatwell Electric Heating Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Hangzhou Heatwell Electric Heating Technology's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 26%, but since then they've fallen to 14%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

On a related note, Hangzhou Heatwell Electric Heating Technology has decreased its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Hangzhou Heatwell Electric Heating Technology's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 28% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with Hangzhou Heatwell Electric Heating Technology and understanding it should be part of your investment process.

While Hangzhou Heatwell Electric Heating Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.