What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after investigating SINOMACH HEAVY EQUIPMENT GROUPLTD (SHSE:601399), we don't think it's current trends fit the mold of a multi-bagger.
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 SINOMACH HEAVY EQUIPMENT GROUPLTD, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0029 = CN¥51m ÷ (CN¥29b - CN¥11b) (Based on the trailing twelve months to September 2023).
So, SINOMACH HEAVY EQUIPMENT GROUPLTD has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.0%.
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're interested in investigating SINOMACH HEAVY EQUIPMENT GROUPLTD's past further, check out this free graph covering SINOMACH HEAVY EQUIPMENT GROUPLTD's past earnings, revenue and cash flow.
What Does the ROCE Trend For SINOMACH HEAVY EQUIPMENT GROUPLTD Tell Us?
On the surface, the trend of ROCE at SINOMACH HEAVY EQUIPMENT GROUPLTD doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.3% from 18% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, SINOMACH HEAVY EQUIPMENT GROUPLTD has decreased its current liabilities to 39% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that SINOMACH HEAVY EQUIPMENT GROUPLTD is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 26% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
On a final note, we've found 1 warning sign for SINOMACH HEAVY EQUIPMENT GROUPLTD that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.