Shaanxi Huaqin Technology IndustryLtd (SHSE:688281) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Shaanxi Huaqin Technology IndustryLtd's (SHSE:688281) returns on capital, so let's have a look.

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

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 Shaanxi Huaqin Technology IndustryLtd is:

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

0.045 = CN¥227m ÷ (CN¥5.5b - CN¥444m) (Based on the trailing twelve months to June 2024).

Therefore, Shaanxi Huaqin Technology IndustryLtd has an ROCE of 4.5%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

Check out our latest analysis for Shaanxi Huaqin Technology IndustryLtd

In the above chart we have measured Shaanxi Huaqin Technology IndustryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shaanxi Huaqin Technology IndustryLtd .

So How Is Shaanxi Huaqin Technology IndustryLtd's ROCE Trending?

Shaanxi Huaqin Technology IndustryLtd has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Shaanxi Huaqin Technology IndustryLtd is utilizing 4,044% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Shaanxi Huaqin Technology IndustryLtd has decreased current liabilities to 8.1% 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.

The Key Takeaway

In summary, it's great to see that Shaanxi Huaqin Technology IndustryLtd has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 40% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 2 warning signs with Shaanxi Huaqin Technology IndustryLtd (at least 1 which can't be ignored) , and understanding them would certainly be useful.

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.