If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Sinomach General Machinery Science & TechnologyLtd (SHSE:600444) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Sinomach General Machinery Science & TechnologyLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = CN¥15m ÷ (CN¥1.2b - CN¥531m) (Based on the trailing twelve months to September 2023).
So, Sinomach General Machinery Science & TechnologyLtd has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Building industry average of 6.4%.
Check out our latest analysis for Sinomach General Machinery Science & TechnologyLtd
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Sinomach General Machinery Science & TechnologyLtd, check out these free graphs here.
The Trend Of ROCE
We're delighted to see that Sinomach General Machinery Science & TechnologyLtd is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 2.3% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Sinomach General Machinery Science & TechnologyLtd is utilizing 23% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 44% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
Our Take On Sinomach General Machinery Science & TechnologyLtd's ROCE
To the delight of most shareholders, Sinomach General Machinery Science & TechnologyLtd has now broken into profitability. Since the stock has returned a solid 79% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Sinomach General Machinery Science & TechnologyLtd can keep these trends up, it could have a bright future ahead.
Sinomach General Machinery Science & TechnologyLtd does have some risks, we noticed 4 warning signs (and 2 which don't sit too well with us) we think you should know about.
While Sinomach General Machinery Science & TechnologyLtd 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.