Slowing Rates Of Return At Inner Mongolia First Machinery GroupLtd (SHSE:600967) Leave Little Room For Excitement

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Inner Mongolia First Machinery GroupLtd (SHSE:600967) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Inner Mongolia First Machinery GroupLtd:

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

0.05 = CN¥615m ÷ (CN¥23b - CN¥10b) (Based on the trailing twelve months to March 2024).

Thus, Inner Mongolia First Machinery GroupLtd has an ROCE of 5.0%. On its own, that's a low figure but it's around the 5.6% average generated by the Machinery industry.

View our latest analysis for Inner Mongolia First Machinery GroupLtd

Above you can see how the current ROCE for Inner Mongolia First Machinery GroupLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Inner Mongolia First Machinery GroupLtd .

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. Over the past five years, ROCE has remained relatively flat at around 5.0% and the business has deployed 35% more capital into its operations. 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 side note, Inner Mongolia First Machinery GroupLtd has done well to reduce current liabilities to 46% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. Although because current liabilities are still 46%, some of that risk is still prevalent.

What We Can Learn From Inner Mongolia First Machinery GroupLtd's ROCE

In conclusion, Inner Mongolia First Machinery GroupLtd has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last five years. Therefore based on the analysis done in this article, we don't think Inner Mongolia First Machinery GroupLtd has the makings of a multi-bagger.

One more thing: We've identified 2 warning signs with Inner Mongolia First Machinery GroupLtd (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While Inner Mongolia First Machinery GroupLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com