Weichai Heavy Machinery (SZSE:000880) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at Weichai Heavy Machinery (SZSE:000880) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Weichai Heavy Machinery is:

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

0.017 = CN¥40m ÷ (CN¥5.7b - CN¥3.4b) (Based on the trailing twelve months to September 2024).

So, Weichai Heavy Machinery has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

View our latest analysis for Weichai Heavy Machinery

Historical performance is a great place to start when researching a stock so above you can see the gauge for Weichai Heavy Machinery's ROCE against it's prior returns. If you'd like to look at how Weichai Heavy Machinery has performed in the past in other metrics, you can view this free graph of Weichai Heavy Machinery's past earnings, revenue and cash flow.

So How Is Weichai Heavy Machinery's ROCE Trending?

The fact that Weichai Heavy Machinery is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 1.7% on its capital. And unsurprisingly, like most companies trying to break into the black, Weichai Heavy Machinery is utilizing 43% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a separate but related note, it's important to know that Weichai Heavy Machinery has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. 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.

The Key Takeaway

Overall, Weichai Heavy Machinery gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 277% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Weichai Heavy Machinery does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

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.