The Returns At Huajin International Holdings (HKG:2738) Aren't Growing

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 Huajin International Holdings' (HKG:2738) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Huajin International Holdings:

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

0.11 = CN¥169m ÷ (CN¥3.8b - CN¥2.2b) (Based on the trailing twelve months to December 2023).

Therefore, Huajin International Holdings has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

View our latest analysis for Huajin International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Huajin International Holdings' ROCE against it's prior returns. If you'd like to look at how Huajin International Holdings has performed in the past in other metrics, you can view this free graph of Huajin International Holdings' past earnings, revenue and cash flow.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. The company has employed 146% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Huajin 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.

On a side note, Huajin International Holdings' current liabilities are still rather high at 59% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To sum it up, Huajin International Holdings has simply been reinvesting capital steadily, at those decent rates of return. However, despite the favorable fundamentals, the stock has fallen 39% over the last five years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

On a final note, we've found 3 warning signs for Huajin International Holdings that we think you should be aware of.

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.