Investors Met With Slowing Returns on Capital At China Energy Engineering (HKG:3996)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 briefly looking over the numbers, we don't think China Energy Engineering (HKG:3996) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for China Energy Engineering, this is the formula:

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

0.07 = CN¥17b ÷ (CN¥478b - CN¥242b) (Based on the trailing twelve months to March 2021).

Therefore, China Energy Engineering has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.2%.

View our latest analysis for China Energy Engineering

In the above chart we have measured China Energy Engineering's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for China Energy Engineering.

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

In terms of China Energy Engineering's historical ROCE trend, it doesn't exactly demand attention. The company has employed 104% more capital in the last five years, and the returns on that capital have remained stable at 7.0%. 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.

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

What We Can Learn From China Energy Engineering's ROCE

As we've seen above, China Energy Engineering's returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about China Energy Engineering, we've spotted 2 warning signs, and 1 of them is significant.

While China Energy Engineering 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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