If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Hebei Huatong Wires and Cables Group (SHSE:605196) looks quite promising in regards to its trends of return on capital.
Understanding 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. Analysts use this formula to calculate it for Hebei Huatong Wires and Cables Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥459m ÷ (CN¥5.8b - CN¥2.8b) (Based on the trailing twelve months to September 2023).
So, Hebei Huatong Wires and Cables Group has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.6% it's much better.
In the above chart we have measured Hebei Huatong Wires and Cables Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Hebei Huatong Wires and Cables Group .
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at Hebei Huatong Wires and Cables Group. Over the last five years, returns on capital employed have risen substantially to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 105%. So we're very much inspired by what we're seeing at Hebei Huatong Wires and Cables Group thanks to its ability to profitably reinvest capital.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 48% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
Our Take On Hebei Huatong Wires and Cables Group's ROCE
In summary, it's great to see that Hebei Huatong Wires and Cables Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Considering the stock has delivered 12% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
While Hebei Huatong Wires and Cables Group looks impressive, no company is worth an infinite price. The intrinsic value infographic for 605196 helps visualize whether it is currently trading for a fair price.
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.