CITIC Heavy Industries (SHSE:601608) Has Some Way To Go To Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at CITIC Heavy Industries (SHSE:601608), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for CITIC Heavy Industries, this is the formula:

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

0.029 = CN¥317m ÷ (CN¥19b - CN¥8.1b) (Based on the trailing twelve months to September 2024).

Therefore, CITIC Heavy Industries has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

Check out our latest analysis for CITIC Heavy Industries

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 CITIC Heavy Industries.

What Can We Tell From CITIC Heavy Industries' ROCE Trend?

There hasn't been much to report for CITIC Heavy Industries' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at CITIC Heavy Industries in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a side note, CITIC Heavy Industries has done well to reduce current liabilities to 42% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 42%, some of that risk is still prevalent.

The Bottom Line On CITIC Heavy Industries' ROCE

We can conclude that in regards to CITIC Heavy Industries' returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 4.9% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

CITIC Heavy Industries does have some risks though, and we've spotted 2 warning signs for CITIC Heavy Industries that you might be interested in.

While CITIC Heavy Industries 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.