Zhengzhou Coal Mining Machinery Group (HKG:564) Is Looking To Continue Growing Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Zhengzhou Coal Mining Machinery Group (HKG:564) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Zhengzhou Coal Mining Machinery Group, this is the formula:

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

0.14 = CN¥3.1b ÷ (CN¥36b - CN¥13b) (Based on the trailing twelve months to March 2021).

Thus, Zhengzhou Coal Mining Machinery Group has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Machinery industry.

See our latest analysis for Zhengzhou Coal Mining Machinery Group

In the above chart we have measured Zhengzhou Coal Mining Machinery Group's 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 Zhengzhou Coal Mining Machinery Group here for free.

What The Trend Of ROCE Can Tell Us

Zhengzhou Coal Mining Machinery Group has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 14% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Zhengzhou Coal Mining Machinery Group is utilizing 131% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 37% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

To the delight of most shareholders, Zhengzhou Coal Mining Machinery Group has now broken into profitability. Since the stock has returned a staggering 197% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Zhengzhou Coal Mining Machinery Group can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 4 warning signs for Zhengzhou Coal Mining Machinery Group you'll probably want to know about.

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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