Ningbo Henghe Precision IndustryLtd (SZSE:300539) Has Some Way To Go To Become A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Ningbo Henghe Precision IndustryLtd (SZSE:300539) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Ningbo Henghe Precision IndustryLtd, this is the formula:

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

0.046 = CN¥35m ÷ (CN¥1.1b - CN¥337m) (Based on the trailing twelve months to September 2024).

So, Ningbo Henghe Precision IndustryLtd has an ROCE of 4.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.4%.

See our latest analysis for Ningbo Henghe Precision IndustryLtd

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ningbo Henghe Precision IndustryLtd.

What Can We Tell From Ningbo Henghe Precision IndustryLtd's ROCE Trend?

The returns on capital haven't changed much for Ningbo Henghe Precision IndustryLtd in recent years. The company has consistently earned 4.6% for the last five years, and the capital employed within the business has risen 39% 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 30% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Ningbo Henghe Precision IndustryLtd's ROCE

As we've seen above, Ningbo Henghe Precision IndustryLtd's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 69% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Ningbo Henghe Precision IndustryLtd does have some risks though, and we've spotted 3 warning signs for Ningbo Henghe Precision IndustryLtd that you might be interested in.

While Ningbo Henghe Precision IndustryLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.