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Some investors may be concerned about Kunshan Huguang Auto HarnessLtd (SHSE:605333)’s returns on equity

If you’re looking for a multi-packer, there are a few things to keep in mind. Among other things, we will want to see two things; first of all, it grows return on capital employed (ROCE), and secondly, the expansion of the enterprise sum capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after examination Kunshan Huguang Auto Harness Ltd (SHSE:605333), we do not believe that current trends do not fit the mold of a multi-packer company.

What is return on capital employed (ROCE)?

For those who 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. The calculation formula at Kunshan Huguang Auto HarnessLtd is as follows:

Return on capital employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Short-term liabilities)

0.093 = CN¥237m ÷ (CN¥6.0b – CN¥3.4b) (Based on the trailing twelve months to March 2024).

Therefore, Kunshan Huguang Auto HarnessLtd has a ROCE of 9.3%. In itself, this is a low return, but compared to the average of 6.9% generated by the auto components industry, it is much better.

Check out our latest analysis for Kunshan Huguang Auto HarnessLtd

SHSE:605333 Return on capital employed June 10, 2024

Above you can see how Kunshan Huguang Auto HarnessLtd’s current ROCE compares to its past returns on equity, but there’s only so much you can tell from the past. If you want, you can check Kunshan Huguang Auto HarnessLtd analyst forecasts for free.

So how does Kunshan Huguang Auto HarnessLtd’s ROCE trend?

We weren’t thrilled with this trend, as Kunshan Huguang Auto HarnessLtd’s ROCE dropped 51% over the last five years while the company employed 315% more capital. With this in mind, Kunshan Huguang Auto HarnessLtd raised some capital ahead of the release of its latest results, which may partially explain the increase in capital employed. The funds raised have probably not been used yet, so it is worth watching what will happen to Kunshan Huguang Auto HarnessLtd’s profits in the future and whether they will change as a result of the capital increase.

It is worth noting that Kunshan Huguang Auto HarnessLtd has a high current liabilities to total assets ratio of 57%. This may pose some risk because the company generally operates quite heavily on its suppliers or other types of short-term creditors. While this is not necessarily a bad thing, it may be beneficial to keep this ratio lower.

What We Can Learn from Kunshan Huguang Auto HarnessLtd’s ROCE

Although returns on capital have declined in the short term, we consider the growth in both revenues and capital employed at Kunshan Huguang Auto HarnessLtd to be encouraging. The stock has followed suit, returning a significant 94% to shareholders over the last three years. So if the upward trends continue, we will be optimistic about the future of the company’s shares.

And finally, we found it 1 warning sign for Kunshan Huguang Auto HarnessLtd that we think you should know about.

Although Kunshan Huguang Auto HarnessLtd does not make the highest profits, check it out free a list of companies that achieve high returns on equity and have solid balance sheets.

Pricing is complex, but we help simplify it.

Find out if Kunshan Huguang Auto HarnessLtd is potentially overvalued or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial condition.

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This article by Simply Wall St is of a general nature. We comment based on historical data and analyst forecasts, using only an unbiased methodology, and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative content. Simply Wall St has no position in any of the stocks mentioned.