We Like These Underlying Return On Capital Trends At Cosmos Machinery Enterprises (HKG:118)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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)

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 Cosmos Machinery Enterprises is:

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

0.084 = HK$144m ÷ (HK$3.0b - HK$1.2b) (Based on the trailing twelve months to December 2021).

Thus, Cosmos Machinery Enterprises has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Machinery industry average of 8.8%.

Check out our latest analysis for Cosmos Machinery Enterprises

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cosmos Machinery Enterprises' ROCE against it's prior returns. 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?

We're delighted to see that Cosmos Machinery Enterprises is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 8.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Cosmos Machinery Enterprises is utilizing 39% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Another thing to note, Cosmos Machinery Enterprises has a high ratio of current liabilities to total assets of 42%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Overall, Cosmos Machinery Enterprises gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 27% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, Cosmos Machinery Enterprises does come with some risks, and we've found 1 warning sign 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.