The Returns At Qingdao Huijintong Power EquipmentLtd (SHSE:603577) Aren't Growing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Qingdao Huijintong Power EquipmentLtd (SHSE:603577) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Qingdao Huijintong Power EquipmentLtd:

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

0.073 = CN¥200m ÷ (CN¥6.1b - CN¥3.3b) (Based on the trailing twelve months to September 2024).

Thus, Qingdao Huijintong Power EquipmentLtd has an ROCE of 7.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.8%.

View our latest analysis for Qingdao Huijintong Power EquipmentLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Qingdao Huijintong Power EquipmentLtd's ROCE against it's prior returns. 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.

The Trend Of ROCE

The returns on capital haven't changed much for Qingdao Huijintong Power EquipmentLtd in recent years. The company has employed 104% more capital in the last five years, and the returns on that capital have remained stable at 7.3%. 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 55%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, Qingdao Huijintong Power EquipmentLtd has simply been reinvesting capital and generating the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 17% 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 have some risks, we noticed 4 warning signs (and 2 which are a bit concerning) we think you should 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.