China Harmony Auto Holding's (HKG:3836) Returns Have Hit A Wall

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at China Harmony Auto Holding's (HKG:3836) 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. To calculate this metric for China Harmony Auto Holding, this is the formula:

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

0.12 = CN¥1.0b ÷ (CN¥13b - CN¥4.1b) (Based on the trailing twelve months to June 2021).

Therefore, China Harmony Auto Holding has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Specialty Retail industry.

See our latest analysis for China Harmony Auto Holding

In the above chart we have measured China Harmony Auto Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering China Harmony Auto Holding here for free.

What Does the ROCE Trend For China Harmony Auto Holding Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 43% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that China Harmony Auto Holding 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 32% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On China Harmony Auto Holding's ROCE

In the end, China Harmony Auto Holding has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 26% over the last five years for shareholders who have owned the stock in this period. So to determine if China Harmony Auto Holding is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

While China Harmony Auto Holding doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While China Harmony Auto Holding 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.

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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