CIMC Enric Holdings (HKG:3899) Has More To Do To Multiply In Value Going Forward

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, the ROCE of CIMC Enric Holdings (HKG:3899) looks decent, right now, so lets see what the trend of returns can tell us.

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 CIMC Enric Holdings is:

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

0.10 = CN¥1.2b ÷ (CN¥22b - CN¥11b) (Based on the trailing twelve months to December 2022).

Thus, CIMC Enric Holdings has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Machinery industry.

View 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 here for free.

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 79% more capital in the last five years, and the returns on that capital have remained stable at 10%. 10% is a pretty standard return, and it provides some comfort knowing that CIMC Enric Holdings has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a separate but related note, it's important to know that CIMC Enric Holdings has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. 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.

What We Can Learn From CIMC Enric Holdings' ROCE

The main thing to remember is that CIMC Enric Holdings has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 17% return to shareholders who held over that period. So to determine if CIMC Enric Holdings is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

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 may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.