Hexing ElectricalLtd (SHSE:603556) Might Have The Makings Of A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Hexing ElectricalLtd (SHSE:603556) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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 Hexing ElectricalLtd:

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

0.17 = CN¥1.2b ÷ (CN¥9.1b - CN¥2.2b) (Based on the trailing twelve months to June 2024).

Thus, Hexing ElectricalLtd has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.5% it's much better.

See our latest analysis for Hexing ElectricalLtd

Above you can see how the current ROCE for Hexing ElectricalLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hexing ElectricalLtd for free.

What Does the ROCE Trend For Hexing ElectricalLtd Tell Us?

Investors would be pleased with what's happening at Hexing ElectricalLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The amount of capital employed has increased too, by 36%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Hexing ElectricalLtd's ROCE

In summary, it's great to see that Hexing ElectricalLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Hexing ElectricalLtd does have some risks though, and we've spotted 1 warning sign for Hexing ElectricalLtd that you might be interested in.

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.