SINOMACH HEAVY EQUIPMENT GROUPLTD (SHSE:601399) Will Be Hoping To Turn Its Returns On Capital Around

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into SINOMACH HEAVY EQUIPMENT GROUPLTD (SHSE:601399), the trends above didn't look too great.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on SINOMACH HEAVY EQUIPMENT GROUPLTD is:

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

0.021 = CN¥384m ÷ (CN¥31b - CN¥13b) (Based on the trailing twelve months to June 2024).

So, SINOMACH HEAVY EQUIPMENT GROUPLTD has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.4%.

View our latest analysis for SINOMACH HEAVY EQUIPMENT GROUPLTD

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of SINOMACH HEAVY EQUIPMENT GROUPLTD.

The Trend Of ROCE

There is reason to be cautious about SINOMACH HEAVY EQUIPMENT GROUPLTD, given the returns are trending downwards. To be more specific, the ROCE was 2.9% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on SINOMACH HEAVY EQUIPMENT GROUPLTD becoming one if things continue as they have.

Another thing to note, SINOMACH HEAVY EQUIPMENT GROUPLTD has a high ratio of current liabilities to total assets of 41%. 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 Key Takeaway

In summary, it's unfortunate that SINOMACH HEAVY EQUIPMENT GROUPLTD is generating lower returns from the same amount of capital. And, the stock has remained flat over the last three years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching SINOMACH HEAVY EQUIPMENT GROUPLTD, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.