Returns On Capital At Hengdian Group DMEGC Magnetics Ltd (SZSE:002056) Have Stalled

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Hengdian Group DMEGC Magnetics Ltd (SZSE:002056) looks decent, right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

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 Hengdian Group DMEGC Magnetics Ltd is:

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

0.16 = CN¥1.6b ÷ (CN¥21b - CN¥12b) (Based on the trailing twelve months to June 2024).

Therefore, Hengdian Group DMEGC Magnetics Ltd has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Electronic industry.

Check out our latest analysis for Hengdian Group DMEGC Magnetics Ltd

Above you can see how the current ROCE for Hengdian Group DMEGC Magnetics Ltd 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 Hengdian Group DMEGC Magnetics Ltd for free.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 98% more capital in the last five years, and the returns on that capital have remained stable at 16%. 16% is a pretty standard return, and it provides some comfort knowing that Hengdian Group DMEGC Magnetics Ltd has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 54% of total assets, this reported ROCE would probably be less than16% because total capital employed would be higher.The 16% ROCE could be even lower if current liabilities weren't 54% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Bottom Line

In the end, Hengdian Group DMEGC Magnetics Ltd has proven its ability to adequately reinvest capital at good rates of return. Therefore it's no surprise that shareholders have earned a respectable 88% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Like most companies, Hengdian Group DMEGC Magnetics Ltd does come with some risks, and we've found 2 warning signs that you should be aware of.

While Hengdian Group DMEGC Magnetics Ltd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.