China PengFei Group (HKG:3348) Might Have The Makings Of A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, China PengFei Group (HKG:3348) looks quite promising in regards to its trends of return on capital.

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 China PengFei Group is:

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

0.18 = CN¥120m ÷ (CN¥2.6b - CN¥2.0b) (Based on the trailing twelve months to December 2020).

So, China PengFei Group has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Machinery industry.

See our latest analysis for China PengFei Group

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 want to delve into the historical earnings, revenue and cash flow of China PengFei Group, check out these free graphs here.

What Does the ROCE Trend For China PengFei Group Tell Us?

The trends we've noticed at China PengFei Group are quite reassuring. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 71% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, China PengFei Group's current liabilities are still rather high at 75% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To sum it up, China PengFei Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 28% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 2 warning signs for China PengFei Group that we think you should be aware of.

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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