The Return Trends At Shaanxi Huaqin Technology IndustryLtd (SHSE:688281) Look Promising

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shaanxi Huaqin Technology IndustryLtd, this is the formula:

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

0.079 = CN¥346m ÷ (CN¥4.7b - CN¥382m) (Based on the trailing twelve months to September 2023).

Thus, Shaanxi Huaqin Technology IndustryLtd has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.6% generated by the Chemicals industry, it's much better.

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, you can check out the forecasts from the analysts covering Shaanxi Huaqin Technology IndustryLtd for free.

What The Trend Of ROCE Can Tell Us

Shaanxi Huaqin Technology IndustryLtd has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 7.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Shaanxi Huaqin Technology IndustryLtd is utilizing 2,879% more capital than it was four years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 8.1%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Shaanxi Huaqin Technology IndustryLtd's ROCE

Overall, Shaanxi Huaqin Technology IndustryLtd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 41% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Shaanxi Huaqin Technology IndustryLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.