If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So, when we ran our eye over Haitian International Holdings' (HKG:1882) trend of ROCE, we liked what we saw.
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. The formula for this calculation on Haitian International Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = CN¥3.0b ÷ (CN¥25b - CN¥8.5b) (Based on the trailing twelve months to June 2022).
Thus, Haitian International Holdings has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Machinery industry.
Above you can see how the current ROCE for Haitian International Holdings 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 Haitian International Holdings here for free.
So How Is Haitian International Holdings' ROCE Trending?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 49% more capital into its operations. 18% is a pretty standard return, and it provides some comfort knowing that Haitian International Holdings 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.
Our Take On Haitian International Holdings' ROCE
To sum it up, Haitian International Holdings has simply been reinvesting capital steadily, at those decent rates of return. Despite the good fundamentals, total returns from the stock have been virtually flat over the last five years. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
If you'd like to know about the risks facing Haitian International Holdings, we've discovered 1 warning sign that you should be aware of.
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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.
Haitian International Holdings
Haitian International Holdings Limited, together with its subsidiaries, engages in manufacturing and distribution of plastic injection molding machines in Mainland China, Hong Kong, and internationally.
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Flawless balance sheet and good value.