Be Wary Of CIMC Enric Holdings (HKG:3899) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at CIMC Enric Holdings (HKG:3899) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 CIMC Enric Holdings is:

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

0.10 = CN¥1.4b ÷ (CN¥28b - CN¥14b) (Based on the trailing twelve months to December 2023).

Therefore, CIMC Enric Holdings has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.3% it's much better.

Check out our latest analysis for CIMC Enric Holdings

In the above chart we have measured CIMC Enric Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering CIMC Enric Holdings for free.

What Does the ROCE Trend For CIMC Enric Holdings Tell Us?

In terms of CIMC Enric Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, CIMC Enric Holdings' current liabilities are still rather high at 51% 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 CIMC Enric Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that CIMC Enric Holdings is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 43% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, CIMC Enric Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While CIMC Enric Holdings 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com