Sichuan Zigong Conveying Machine Group (SZSE:001288) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Sichuan Zigong Conveying Machine Group (SZSE:001288) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. Analysts use this formula to calculate it for Sichuan Zigong Conveying Machine Group:

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

0.05 = CN¥137m ÷ (CN¥3.5b - CN¥828m) (Based on the trailing twelve months to June 2024).

Therefore, Sichuan Zigong Conveying Machine Group has an ROCE of 5.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

View our latest analysis for Sichuan Zigong Conveying Machine Group

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

How Are Returns Trending?

When we looked at the ROCE trend at Sichuan Zigong Conveying Machine Group, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 5.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Sichuan Zigong Conveying Machine Group has done well to pay down its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Sichuan Zigong Conveying Machine Group's ROCE

While returns have fallen for Sichuan Zigong Conveying Machine Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 46% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we found 2 warning signs for Sichuan Zigong Conveying Machine Group (1 makes us a bit uncomfortable) you should be aware of.

While Sichuan Zigong Conveying Machine Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.