Investors Will Want AVIC Heavy Machinery's (SHSE:600765) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, AVIC Heavy Machinery (SHSE:600765) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

For those that 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. To calculate this metric for AVIC Heavy Machinery, this is the formula:

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

0.11 = CN¥1.6b ÷ (CN¥26b - CN¥11b) (Based on the trailing twelve months to March 2024).

Therefore, AVIC Heavy Machinery has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Machinery industry.

Check out our latest analysis for AVIC Heavy Machinery

Above you can see how the current ROCE for AVIC Heavy Machinery 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 AVIC Heavy Machinery for free.

So How Is AVIC Heavy Machinery's ROCE Trending?

Investors would be pleased with what's happening at AVIC Heavy Machinery. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 132%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that AVIC Heavy Machinery has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From AVIC Heavy Machinery's ROCE

To sum it up, AVIC Heavy Machinery has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing AVIC Heavy Machinery, we've discovered 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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