Returns On Capital At Hengdian Group DMEGC Magnetics Ltd (SZSE:002056) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Hengdian Group DMEGC Magnetics Ltd's (SZSE:002056) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Hengdian Group DMEGC Magnetics Ltd, this is the formula:

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

0.13 = CN¥1.3b ÷ (CN¥21b - CN¥11b) (Based on the trailing twelve months to September 2024).

Thus, Hengdian Group DMEGC Magnetics Ltd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Electronic industry.

View 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Hengdian Group DMEGC Magnetics Ltd .

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 86% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Hengdian Group DMEGC Magnetics Ltd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 53% of total assets, this reported ROCE would probably be less than13% because total capital employed would be higher.The 13% ROCE could be even lower if current liabilities weren't 53% 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.

What We Can Learn From Hengdian Group DMEGC Magnetics Ltd's ROCE

To sum it up, Hengdian Group DMEGC Magnetics Ltd has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 11% over the last five years for shareholders who have owned the stock in this period. So to determine if Hengdian Group DMEGC Magnetics Ltd is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Hengdian Group DMEGC Magnetics Ltd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.