Sany Heavy IndustryLtd's (SHSE:600031) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Sany Heavy IndustryLtd (SHSE:600031), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Sany Heavy IndustryLtd, this is the formula:

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

0.061 = CN¥5.6b ÷ (CN¥150b - CN¥58b) (Based on the trailing twelve months to September 2024).

So, Sany Heavy IndustryLtd has an ROCE of 6.1%. In absolute terms, that's a low return but it's around the Machinery industry average of 5.3%.

See our latest analysis for Sany Heavy IndustryLtd

Above you can see how the current ROCE for Sany Heavy IndustryLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sany Heavy IndustryLtd for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Sany Heavy IndustryLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 26% over the last five years. However it looks like Sany Heavy IndustryLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Sany Heavy IndustryLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Sany Heavy IndustryLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 29% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing, we've spotted 1 warning sign facing Sany Heavy IndustryLtd that you might find interesting.

While Sany Heavy IndustryLtd 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.