Here's What To Make Of SINOPEC Engineering (Group)'s (HKG:2386) Decelerating Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating SINOPEC Engineering (Group) (HKG:2386), we don't think it's current trends fit the mold of a multi-bagger.

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 SINOPEC Engineering (Group) is:

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

0.053 = CN¥1.7b ÷ (CN¥73b - CN¥41b) (Based on the trailing twelve months to December 2021).

Thus, SINOPEC Engineering (Group) has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.1%.

Check out our latest analysis for SINOPEC Engineering (Group)

In the above chart we have measured SINOPEC Engineering (Group)'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 SINOPEC Engineering (Group).

The Trend Of ROCE

Over the past five years, SINOPEC Engineering (Group)'s ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if SINOPEC Engineering (Group) doesn't end up being a multi-bagger in a few years time. This probably explains why SINOPEC Engineering (Group) is paying out 59% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

On a side note, SINOPEC Engineering (Group)'s current liabilities are still rather high at 57% 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.

The Bottom Line On SINOPEC Engineering (Group)'s ROCE

In summary, SINOPEC Engineering (Group) isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 1 warning sign for SINOPEC Engineering (Group) you'll probably want to know about.

While SINOPEC Engineering (Group) 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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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.