China Energy Engineering (HKG:3996) Has Some Way To Go To Become A Multi-Bagger

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. 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 China Energy Engineering (HKG:3996) 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 China Energy Engineering is:

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

0.05 = CN¥18b ÷ (CN¥763b - CN¥402b) (Based on the trailing twelve months to September 2023).

Therefore, China Energy Engineering has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.5%.

Check out our latest analysis for China Energy Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Energy Engineering's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of China Energy Engineering, check out these free graphs here.

What Does the ROCE Trend For China Energy Engineering Tell Us?

The returns on capital haven't changed much for China Energy Engineering in recent years. The company has employed 120% more capital in the last five years, and the returns on that capital have remained stable at 5.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, China Energy Engineering's current liabilities are still rather high at 53% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In conclusion, China Energy Engineering has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 5.9% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we found 2 warning signs for China Energy Engineering (1 is significant) you should be aware of.

While China Energy Engineering 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.