COFCO Technology & Industry (SZSE:301058) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at COFCO Technology & Industry (SZSE:301058) so let's look a bit deeper.

Understanding 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. To calculate this metric for COFCO Technology & Industry, this is the formula:

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

0.10 = CN¥225m ÷ (CN¥4.2b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

Therefore, COFCO Technology & Industry has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 6.1% it's much better.

View our latest analysis for COFCO Technology & Industry

Above you can see how the current ROCE for COFCO Technology & Industry compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for COFCO Technology & Industry .

What Does the ROCE Trend For COFCO Technology & Industry Tell Us?

Investors would be pleased with what's happening at COFCO Technology & Industry. Over the last five years, returns on capital employed have risen substantially to 10%. The amount of capital employed has increased too, by 95%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, COFCO Technology & Industry's current liabilities are still rather high at 46% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On COFCO Technology & Industry's ROCE

All in all, it's terrific to see that COFCO Technology & Industry is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 27% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, COFCO Technology & Industry does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.