SINOPEC Engineering (Group) (HKG:2386) Has Some Way To Go To Become A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating SINOPEC Engineering (Group) (HKG:2386), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for SINOPEC Engineering (Group), this is the formula:

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

0.056 = CN¥1.8b ÷ (CN¥79b - CN¥46b) (Based on the trailing twelve months to December 2022).

So, SINOPEC Engineering (Group) has an ROCE of 5.6%. On its own, that's a low figure but it's around the 7.0% average generated by the Construction industry.

See 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).

What Can We Tell From SINOPEC Engineering (Group)'s ROCE Trend?

There hasn't been much to report for SINOPEC Engineering (Group)'s returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at SINOPEC Engineering (Group) in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. On top of that you'll notice that SINOPEC Engineering (Group) has been paying out a large portion (63%) of earnings in the form of dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

Another thing to note, SINOPEC Engineering (Group) has a high ratio of current liabilities to total assets of 59%. 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.

Our Take On SINOPEC Engineering (Group)'s ROCE

In a nutshell, SINOPEC Engineering (Group) has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 25% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think SINOPEC Engineering (Group) has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with SINOPEC Engineering (Group) and understanding it 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.