There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Harbin Electric Corporation Jiamusi Electric MachineLtd (SZSE:000922), it didn't seem to tick all of these boxes.
What Is 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. The formula for this calculation on Harbin Electric Corporation Jiamusi Electric MachineLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥356m ÷ (CN¥6.2b - CN¥3.0b) (Based on the trailing twelve months to September 2023).
Therefore, Harbin Electric Corporation Jiamusi Electric MachineLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Electrical industry.
In the above chart we have measured Harbin Electric Corporation Jiamusi Electric MachineLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Harbin Electric Corporation Jiamusi Electric MachineLtd .
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Harbin Electric Corporation Jiamusi Electric MachineLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 16% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 47%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 11%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
Our Take On Harbin Electric Corporation Jiamusi Electric MachineLtd's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Harbin Electric Corporation Jiamusi Electric MachineLtd. In light of this, the stock has only gained 23% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
One more thing: We've identified 2 warning signs with Harbin Electric Corporation Jiamusi Electric MachineLtd (at least 1 which is concerning) , and understanding these would certainly be useful.
While Harbin Electric Corporation Jiamusi Electric MachineLtd 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.
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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.