Investors Met With Slowing Returns on Capital At Qingdao Hanhe CableLtd (SZSE:002498)

Simply Wall St · 10/17 00:23

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Qingdao Hanhe CableLtd (SZSE:002498) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Qingdao Hanhe CableLtd, this is the formula:

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

0.09 = CN¥739m ÷ (CN¥12b - CN¥3.4b) (Based on the trailing twelve months to June 2024).

So, Qingdao Hanhe CableLtd has an ROCE of 9.0%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 5.9%.

Check out our latest analysis for Qingdao Hanhe CableLtd

roce
SZSE:002498 Return on Capital Employed October 17th 2024

In the above chart we have measured Qingdao Hanhe CableLtd'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 Qingdao Hanhe CableLtd .

So How Is Qingdao Hanhe CableLtd's ROCE Trending?

There are better returns on capital out there than what we're seeing at Qingdao Hanhe CableLtd. The company has consistently earned 9.0% for the last five years, and the capital employed within the business has risen 69% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 29% of total assets, this reported ROCE would probably be less than9.0% because total capital employed would be higher.The 9.0% ROCE could be even lower if current liabilities weren't 29% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

In Conclusion...

In summary, Qingdao Hanhe CableLtd has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 15% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we've found 1 warning sign for Qingdao Hanhe CableLtd that we think 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.