Chongqing Machinery & Electric (HKG:2722) Is Doing The Right Things To Multiply Its Share Price

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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 Chongqing Machinery & Electric's (HKG:2722) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Chongqing Machinery & Electric:

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

0.00031 = CN¥3.0m ÷ (CN¥16b - CN¥6.9b) (Based on the trailing twelve months to June 2021).

So, Chongqing Machinery & Electric has an ROCE of 0.03%. Ultimately, that's a low return and it under-performs the Industrials industry average of 3.5%.

Check out our latest analysis for Chongqing Machinery & Electric

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Chongqing Machinery & Electric's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Chongqing Machinery & Electric's ROCE Trending?

Shareholders will be relieved that Chongqing Machinery & Electric has broken into profitability. The company now earns 0.03% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Chongqing Machinery & Electric has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Another thing to note, Chongqing Machinery & Electric has a high ratio of current liabilities to total assets of 42%. 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 Key Takeaway

To sum it up, Chongqing Machinery & Electric is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 26% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Chongqing Machinery & Electric we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

While Chongqing Machinery & Electric 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.