Capital Allocation Trends At Sany Heavy Equipment International Holdings (HKG:631) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at Sany Heavy Equipment International Holdings (HKG:631) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sany Heavy Equipment International Holdings is:

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

0.066 = CN¥1.3b ÷ (CN¥38b - CN¥18b) (Based on the trailing twelve months to September 2024).

Thus, Sany Heavy Equipment International Holdings has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.1%.

View our latest analysis for Sany Heavy Equipment International Holdings

In the above chart we have measured Sany Heavy Equipment International Holdings' 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 Sany Heavy Equipment International Holdings for free.

So How Is Sany Heavy Equipment International Holdings' ROCE Trending?

On the surface, the trend of ROCE at Sany Heavy Equipment International Holdings doesn't inspire confidence. Around five years ago the returns on capital were 9.3%, but since then they've fallen to 6.6%. However it looks like Sany Heavy Equipment International Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Sany Heavy Equipment International Holdings' current liabilities are still rather high at 47% of total assets. 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. 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 Sany Heavy Equipment International Holdings is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 31% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 1 warning sign for Sany Heavy Equipment International Holdings that we think you should be aware of.

While Sany Heavy Equipment International 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.