Inner Mongolia First Machinery GroupLtd (SHSE:600967) Has More To Do To Multiply In Value Going Forward

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Inner Mongolia First Machinery GroupLtd (SHSE:600967) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Inner Mongolia First Machinery GroupLtd, this is the formula:

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

0.047 = CN¥555m ÷ (CN¥21b - CN¥9.6b) (Based on the trailing twelve months to September 2023).

Thus, Inner Mongolia First Machinery GroupLtd has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.0%.

Check out our latest analysis for Inner Mongolia First Machinery GroupLtd

In the above chart we have measured Inner Mongolia First Machinery GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Inner Mongolia First Machinery GroupLtd for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Inner Mongolia First Machinery GroupLtd. The company has employed 33% more capital in the last five years, and the returns on that capital have remained stable at 4.7%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a separate but related note, it's important to know that Inner Mongolia First Machinery GroupLtd has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Inner Mongolia First Machinery GroupLtd's ROCE

Long story short, while Inner Mongolia First Machinery GroupLtd has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 2 warning signs for Inner Mongolia First Machinery GroupLtd (1 makes us a bit uncomfortable) 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.