There Are Reasons To Feel Uneasy About Sichuan Zigong Conveying Machine Group's (SZSE:001288) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Sichuan Zigong Conveying Machine Group (SZSE:001288), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Sichuan Zigong Conveying Machine Group is:

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

0.036 = CN¥96m ÷ (CN¥3.3b - CN¥635m) (Based on the trailing twelve months to September 2023).

Thus, Sichuan Zigong Conveying Machine Group has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.0%.

See 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sichuan Zigong Conveying Machine Group.

So How Is Sichuan Zigong Conveying Machine Group's ROCE Trending?

In terms of Sichuan Zigong Conveying Machine Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 3.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. 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 19% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sichuan Zigong Conveying Machine Group. And the stock has followed suit returning a meaningful 9.2% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 2 warning signs with Sichuan Zigong Conveying Machine Group and understanding them should be part of your investment process.

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.