Investors Could Be Concerned With China Energy Engineering's (HKG:3996) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating China Energy Engineering (HKG:3996), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.045 = CN¥19b ÷ (CN¥858b - CN¥439b) (Based on the trailing twelve months to September 2024).

So, China Energy Engineering has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.4%.

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're interested in investigating China Energy Engineering's past further, check out this free graph covering China Energy Engineering's past earnings, revenue and cash flow.

So How Is China Energy Engineering's ROCE Trending?

When we looked at the ROCE trend at China Energy Engineering, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.5% from 6.3% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, China Energy Engineering has a high ratio of current liabilities to total assets of 51%. 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...

To conclude, we've found that China Energy Engineering is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 46% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for China Energy Engineering that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.