Some Investors May Be Worried About Sany Heavy IndustryLtd's (SHSE:600031) Returns On Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Sany Heavy IndustryLtd (SHSE:600031), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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).

Therefore, 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 5.2%.

View 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.

So How Is Sany Heavy IndustryLtd's ROCE Trending?

On the surface, the trend of ROCE at Sany Heavy IndustryLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.1% from 26% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

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. And with the stock having returned a mere 17% 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.

One more thing to note, we've identified 1 warning sign with Sany Heavy IndustryLtd and understanding it should be part of your investment process.

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.