Harson Trading (China)Ltd (SHSE:603958) Is Experiencing Growth In Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Harson Trading (China)Ltd (SHSE:603958) so let's look a bit deeper.

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 Harson Trading (China)Ltd is:

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

0.019 = CN¥16m ÷ (CN¥957m - CN¥132m) (Based on the trailing twelve months to March 2024).

So, Harson Trading (China)Ltd has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.5%.

View our latest analysis for Harson Trading (China)Ltd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Harson Trading (China)Ltd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Harson Trading (China)Ltd.

What Does the ROCE Trend For Harson Trading (China)Ltd Tell Us?

It's great to see that Harson Trading (China)Ltd has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.9% on their capital employed. Additionally, the business is utilizing 21% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

Our Take On Harson Trading (China)Ltd's ROCE

In summary, it's great to see that Harson Trading (China)Ltd has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 0.8% to shareholders. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 1 warning sign for Harson Trading (China)Ltd you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.