Sichuan Kexin Mechanical and Electrical EquipmentLtd (SZSE:300092) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Sichuan Kexin Mechanical and Electrical EquipmentLtd (SZSE:300092) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Sichuan Kexin Mechanical and Electrical EquipmentLtd, this is the formula:

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

0.12 = CN¥170m ÷ (CN¥2.3b - CN¥897m) (Based on the trailing twelve months to June 2023).

Therefore, Sichuan Kexin Mechanical and Electrical EquipmentLtd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.1% it's much better.

See our latest analysis for Sichuan Kexin Mechanical and Electrical EquipmentLtd

In the above chart we have measured Sichuan Kexin Mechanical and Electrical EquipmentLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sichuan Kexin Mechanical and Electrical EquipmentLtd for free.

What Can We Tell From Sichuan Kexin Mechanical and Electrical EquipmentLtd's ROCE Trend?

We like the trends that we're seeing from Sichuan Kexin Mechanical and Electrical EquipmentLtd. Over the last five years, returns on capital employed have risen substantially to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 162% more capital is being employed now too. So we're very much inspired by what we're seeing at Sichuan Kexin Mechanical and Electrical EquipmentLtd thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 38% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Sichuan Kexin Mechanical and Electrical EquipmentLtd's ROCE

In summary, it's great to see that Sichuan Kexin Mechanical and Electrical EquipmentLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Considering the stock has delivered 21% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

If you want to know some of the risks facing Sichuan Kexin Mechanical and Electrical EquipmentLtd we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.