Investors Will Want Metallurgical Corporation of China's (HKG:1618) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Metallurgical Corporation of China's (HKG:1618) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Metallurgical Corporation of China is:

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

0.10 = CN¥19b ÷ (CN¥584b - CN¥392b) (Based on the trailing twelve months to March 2022).

Therefore, Metallurgical Corporation of China has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 8.4% it's much better.

See our latest analysis for Metallurgical Corporation of China

In the above chart we have measured Metallurgical Corporation of China's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Metallurgical Corporation of China.

So How Is Metallurgical Corporation of China's ROCE Trending?

Metallurgical Corporation of China is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 10%. The amount of capital employed has increased too, by 43%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Metallurgical Corporation of China's current liabilities are still rather high at 67% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Metallurgical Corporation of China's ROCE

In summary, it's great to see that Metallurgical Corporation of China 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. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 2 warning signs with Metallurgical Corporation of China and understanding these should be part of your investment process.

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.