China Railway Construction Heavy Industry (SHSE:688425) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at China Railway Construction Heavy Industry (SHSE:688425) and its ROCE trend, we weren't exactly thrilled.

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

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 China Railway Construction Heavy Industry:

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

0.074 = CN¥1.4b ÷ (CN¥27b - CN¥8.8b) (Based on the trailing twelve months to March 2024).

Therefore, China Railway Construction Heavy Industry has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.8%.

View our latest analysis for China Railway Construction Heavy Industry

Above you can see how the current ROCE for China Railway Construction Heavy Industry 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 China Railway Construction Heavy Industry .

How Are Returns Trending?

On the surface, the trend of ROCE at China Railway Construction Heavy Industry doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 7.4%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On China Railway Construction Heavy Industry's ROCE

To conclude, we've found that China Railway Construction Heavy Industry is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 24% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think China Railway Construction Heavy Industry has the makings of a multi-bagger.

If you want to continue researching China Railway Construction Heavy Industry, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.