Is Cosmos Machinery Enterprises (HKG:118) A Future Multi-bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 Cosmos Machinery Enterprises (HKG:118) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Cosmos Machinery Enterprises, this is the formula:

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

0.004 = HK$5.9m ÷ (HK$2.6b - HK$1.1b) (Based on the trailing twelve months to June 2020).

Therefore, Cosmos Machinery Enterprises has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.7%.

Check out our latest analysis for Cosmos Machinery Enterprises

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'd like to look at how Cosmos Machinery Enterprises has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Cosmos Machinery Enterprises' ROCE Trending?

While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 35% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a separate but related note, it's important to know that Cosmos Machinery Enterprises has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. 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 Cosmos Machinery Enterprises' ROCE

To bring it all together, Cosmos Machinery Enterprises has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 12% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a separate note, we've found 2 warning signs for Cosmos Machinery Enterprises you'll probably want to know about.

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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