Returns On Capital At CIMC Enric Holdings (HKG:3899) Have Hit The Brakes

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over CIMC Enric Holdings' (HKG:3899) trend of ROCE, we liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.11 = CN¥1.4b ÷ (CN¥24b - CN¥11b) (Based on the trailing twelve months to June 2023).

So, CIMC Enric Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 7.4% it's much better.

Check out our latest analysis for CIMC Enric Holdings

Above you can see how the current ROCE for CIMC Enric Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. 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?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 86% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that CIMC Enric Holdings has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, CIMC Enric Holdings' current liabilities are still rather high at 48% 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.

What We Can Learn From CIMC Enric Holdings' ROCE

In the end, CIMC Enric Holdings has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 3.9% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you're still interested in CIMC Enric Holdings it's worth checking out our FREE intrinsic value approximation for 3899 to see if it's trading at an attractive price in other respects.

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.