Metallurgical Corporation of China (HKG:1618) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Metallurgical Corporation of China (HKG:1618) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. 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)

0.073 = CN¥16b ÷ (CN¥703b - CN¥478b) (Based on the trailing twelve months to March 2024).

Thus, Metallurgical Corporation of China has an ROCE of 7.3%. In absolute terms, that's a low return but it's around the Construction industry average of 7.6%.

View 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, you can check out the forecasts from the analysts covering Metallurgical Corporation of China for free.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 9.5% five years ago, while the business's capital employed increased by 51%. That being said, Metallurgical Corporation of China raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Metallurgical Corporation of China might not have received a full period of earnings contribution from it.

On a side note, Metallurgical Corporation of China's current liabilities are still rather high at 68% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

To conclude, we've found that Metallurgical Corporation of China is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Metallurgical Corporation of China has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Metallurgical Corporation of China that you might find interesting.

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.

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