Investors Will Want Weichai Power's (HKG:2338) Growth In ROCE To Persist

By
Simply Wall St
Published
April 18, 2022
SEHK:2338
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Weichai Power's (HKG:2338) returns on capital, so let's have a look.

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

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 Weichai Power is:

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

0.075 = CN¥12b ÷ (CN¥277b - CN¥115b) (Based on the trailing twelve months to December 2021).

Thus, Weichai Power has an ROCE of 7.5%. In absolute terms, that's a low return but it's around the Machinery industry average of 9.0%.

View our latest analysis for Weichai Power

roce
SEHK:2338 Return on Capital Employed April 18th 2022

Above you can see how the current ROCE for Weichai Power compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Weichai Power here for free.

So How Is Weichai Power's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 7.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 55% more capital is being employed now too. 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, Weichai Power's current liabilities are still rather high at 42% 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.

Our Take On Weichai Power's ROCE

All in all, it's terrific to see that Weichai Power is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 121% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 3 warning signs facing Weichai Power that you might find interesting.

While Weichai Power isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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