We Like These Underlying Return On Capital Trends At Huagong Tech (SZSE:000988)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at Huagong Tech (SZSE:000988) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Huagong Tech is:

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

0.057 = CN¥729m ÷ (CN¥20b - CN¥7.0b) (Based on the trailing twelve months to September 2024).

Therefore, Huagong Tech has an ROCE of 5.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

View our latest analysis for Huagong Tech

In the above chart we have measured Huagong Tech'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 Huagong Tech for free.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 5.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 98%. So we're very much inspired by what we're seeing at Huagong Tech thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Huagong Tech 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 a remarkable 110% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

Like most companies, Huagong Tech does come with some risks, and we've found 1 warning sign that you should be aware of.

While Huagong Tech 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.