Shanghai Huafon Aluminium (SHSE:601702) Could Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Shanghai Huafon Aluminium (SHSE:601702) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shanghai Huafon Aluminium, this is the formula:

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

0.23 = CN¥1.3b ÷ (CN¥7.6b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

Thus, Shanghai Huafon Aluminium has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 6.8% earned by companies in a similar industry.

View our latest analysis for Shanghai Huafon Aluminium

Above you can see how the current ROCE for Shanghai Huafon Aluminium 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 Shanghai Huafon Aluminium for free.

So How Is Shanghai Huafon Aluminium's ROCE Trending?

We like the trends that we're seeing from Shanghai Huafon Aluminium. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 23%. The amount of capital employed has increased too, by 252%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Shanghai Huafon Aluminium has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Shanghai Huafon Aluminium's ROCE

In summary, it's great to see that Shanghai Huafon Aluminium 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 investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 30% return over the last three years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 601702 on our platform that is definitely worth checking out.

Shanghai Huafon Aluminium is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.