Returns Are Gaining Momentum At China Electronics Huada Technology (HKG:85)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at China Electronics Huada Technology (HKG:85) and its trend of ROCE, we really liked what we saw.

Understanding 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. To calculate this metric for China Electronics Huada Technology, this is the formula:

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

0.16 = HK$280m ÷ (HK$3.5b - HK$1.7b) (Based on the trailing twelve months to June 2022).

So, China Electronics Huada Technology has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 14%.

View our latest analysis for China Electronics Huada Technology

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

The Trend Of ROCE

China Electronics Huada Technology has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 146% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 49%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Key Takeaway

In summary, we're delighted to see that China Electronics Huada Technology has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 10% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you'd like to know more about China Electronics Huada Technology, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While China Electronics Huada Technology 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.