What are the early trends we should look for to identify a stock that could 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. Speaking of which, we noticed some great changes in Shaanxi Huaqin Technology IndustryLtd's (SHSE:688281) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shaanxi Huaqin Technology IndustryLtd is:

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

0.079 = CN¥346m ÷ (CN¥4.7b - CN¥382m) (Based on the trailing twelve months to September 2023).

Thus, Shaanxi Huaqin Technology IndustryLtd has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.7% generated by the Chemicals industry, it's much better.

Above you can see how the current ROCE for Shaanxi Huaqin Technology IndustryLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shaanxi Huaqin Technology IndustryLtd.

What Can We Tell From Shaanxi Huaqin Technology IndustryLtd's ROCE Trend?

We're delighted to see that Shaanxi Huaqin Technology IndustryLtd is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses four years ago, but now it's earning 7.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Shaanxi Huaqin Technology IndustryLtd is utilizing 2,879% more capital than it was four years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Shaanxi Huaqin Technology IndustryLtd has decreased current liabilities to 8.1% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Shaanxi Huaqin Technology IndustryLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Shaanxi Huaqin Technology IndustryLtd's ROCE

To the delight of most shareholders, Shaanxi Huaqin Technology IndustryLtd has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 41% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Shaanxi Huaqin Technology IndustryLtd does come with some risks, and we've found 1 warning sign that 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.