Returns On Capital Are Showing Encouraging Signs At China PengFei Group (HKG:3348)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for China PengFei Group, this is the formula:

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

0.15 = CN¥120m ÷ (CN¥2.9b - CN¥2.1b) (Based on the trailing twelve months to June 2022).

Thus, China PengFei Group has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.9% it's much better.

Check out 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're interested in investigating China PengFei Group's past further, check out this free graph of past earnings, revenue and cash flow.

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

Investors would be pleased with what's happening at China PengFei Group. Over the last five years, returns on capital employed have risen substantially to 15%. The amount of capital employed has increased too, by 81%. 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.

Another thing to note, China PengFei Group has a high ratio of current liabilities to total assets of 73%. 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

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. Since the stock has only returned 18% to shareholders over the last three years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

China PengFei Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While China PengFei 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.