Investors Met With Slowing Returns on Capital At CITIC Heavy Industries (SHSE:601608)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at CITIC Heavy Industries (SHSE:601608) and its ROCE trend, we weren't exactly thrilled.

What Is 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 CITIC Heavy Industries, this is the formula:

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

0.032 = CN¥322m ÷ (CN¥18b - CN¥8.0b) (Based on the trailing twelve months to March 2024).

So, CITIC Heavy Industries has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

View our latest analysis for CITIC Heavy Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for CITIC Heavy Industries' ROCE against it's prior returns. If you're interested in investigating CITIC Heavy Industries' past further, check out this free graph covering CITIC Heavy Industries' past earnings, revenue and cash flow.

The Trend Of ROCE

Over the past five years, CITIC Heavy Industries' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're 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' current liabilities are still rather high at 44% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, CITIC Heavy Industries isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly then, the total return to shareholders over the last five years has been flat. 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.

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.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.