The Returns On Capital At Huazhong In-Vehicle Holdings (HKG:6830) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Huazhong In-Vehicle Holdings (HKG:6830), we don't think it's current trends fit the mold of a multi-bagger.

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 Huazhong In-Vehicle Holdings is:

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

0.074 = CN¥105m ÷ (CN¥3.3b - CN¥1.9b) (Based on the trailing twelve months to June 2021).

Thus, Huazhong In-Vehicle Holdings has an ROCE of 7.4%. In absolute terms, that's a low return but it's around the Auto Components industry average of 6.2%.

See our latest analysis for Huazhong In-Vehicle Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huazhong In-Vehicle Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Huazhong In-Vehicle Holdings, check out these free graphs here.

What Does the ROCE Trend For Huazhong In-Vehicle Holdings Tell Us?

In terms of Huazhong In-Vehicle Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 17%, but since then they've fallen to 7.4%. However it looks like Huazhong In-Vehicle Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Huazhong In-Vehicle Holdings has a high ratio of current liabilities to total assets of 57%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To conclude, we've found that Huazhong In-Vehicle Holdings is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 415% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about Huazhong In-Vehicle Holdings, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Huazhong In-Vehicle Holdings 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.
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