Investors Met With Slowing Returns on Capital At Qingdao Huijintong Power EquipmentLtd (SHSE:603577)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Qingdao Huijintong Power EquipmentLtd (SHSE:603577), it didn't seem to tick all of these boxes.

Understanding 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. The formula for this calculation on Qingdao Huijintong Power EquipmentLtd is:

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

0.066 = CN¥145m ÷ (CN¥5.6b - CN¥3.4b) (Based on the trailing twelve months to September 2023).

Thus, Qingdao Huijintong Power EquipmentLtd has an ROCE of 6.6%. On its own, that's a low figure but it's around the 6.3% average generated by the Metals and Mining industry.

See our latest analysis for Qingdao Huijintong Power EquipmentLtd

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're interested in investigating Qingdao Huijintong Power EquipmentLtd's past further, check out this free graph covering Qingdao Huijintong Power EquipmentLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

The returns on capital haven't changed much for Qingdao Huijintong Power EquipmentLtd in recent years. The company has consistently earned 6.6% for the last five years, and the capital employed within the business has risen 141% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a separate but related note, it's important to know that Qingdao Huijintong Power EquipmentLtd has a current liabilities to total assets ratio of 60%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Qingdao Huijintong Power EquipmentLtd's ROCE

Long story short, while Qingdao Huijintong Power EquipmentLtd has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 0.4% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Qingdao Huijintong Power EquipmentLtd does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.