Here's What To Make Of Haitian International Holdings' (HKG:1882) Decelerating Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Haitian International Holdings' (HKG:1882) ROCE trend, we were pretty happy with 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. Analysts use this formula to calculate it for Haitian International Holdings:

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).

Therefore, Haitian International Holdings has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.9% it's much better.

Our analysis indicates that 1882 is potentially undervalued!

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 current returns on capital are decent, they haven't changed much. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 49% in that time. 18% is a pretty standard return, and it provides some comfort knowing that Haitian International Holdings 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.

Our Take On Haitian International Holdings' ROCE

The main thing to remember is that Haitian International Holdings has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 16% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

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.

While Haitian International Holdings 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.