The Returns On Capital At Sijin Intelligent Forming Machinery (SZSE:003025) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Sijin Intelligent Forming Machinery (SZSE:003025), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Sijin Intelligent Forming Machinery is:

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

0.13 = CN¥146m ÷ (CN¥1.3b - CN¥177m) (Based on the trailing twelve months to September 2024).

Thus, Sijin Intelligent Forming Machinery has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.3% generated by the Machinery industry.

See our latest analysis for Sijin Intelligent Forming Machinery

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sijin Intelligent Forming Machinery.

How Are Returns Trending?

When we looked at the ROCE trend at Sijin Intelligent Forming Machinery, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 21% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sijin Intelligent Forming Machinery. Furthermore the stock has climbed 29% over the last three years, it would appear that investors are upbeat about the future. 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 separate note, we've found 1 warning sign for Sijin Intelligent Forming Machinery you'll probably want to know about.

While Sijin Intelligent Forming Machinery may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.