SINOMACH HEAVY EQUIPMENT GROUPLTD (SHSE:601399) Is Doing The Right Things To Multiply Its Share Price

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at SINOMACH HEAVY EQUIPMENT GROUPLTD (SHSE:601399) so let's look a bit deeper.

Understanding 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 SINOMACH HEAVY EQUIPMENT GROUPLTD, this is the formula:

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

0.027 = CN¥485m ÷ (CN¥32b - CN¥13b) (Based on the trailing twelve months to September 2024).

Therefore, SINOMACH HEAVY EQUIPMENT GROUPLTD has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

View our latest analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD

In the above chart we have measured SINOMACH HEAVY EQUIPMENT 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 SINOMACH HEAVY EQUIPMENT GROUPLTD for free.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 38% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, SINOMACH HEAVY EQUIPMENT GROUPLTD's current liabilities are still rather high at 42% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On SINOMACH HEAVY EQUIPMENT GROUPLTD's ROCE

To sum it up, SINOMACH HEAVY EQUIPMENT GROUPLTD is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 22% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for 601399 that compares the share price and estimated value.

While SINOMACH HEAVY EQUIPMENT GROUPLTD 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.