Returns At Sany Heavy Equipment International Holdings (HKG:631) Are On The Way Up

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Sany Heavy Equipment International Holdings (HKG:631) looks quite promising in regards to its trends of return on capital.

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 Sany Heavy Equipment International Holdings is:

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

0.086 = CN¥984m ÷ (CN¥23b - CN¥12b) (Based on the trailing twelve months to September 2022).

Thus, Sany Heavy Equipment International Holdings has an ROCE of 8.6%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 7.1%.

Our analysis indicates that 631 is potentially overvalued!

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 to see what analysts are forecasting going forward, you should check out our free report for Sany Heavy Equipment International Holdings.

How Are Returns Trending?

We're delighted to see that Sany Heavy Equipment International Holdings is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 8.6% on its capital. And unsurprisingly, like most companies trying to break into the black, Sany Heavy Equipment International Holdings is utilizing 36% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

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. Effectively this means that suppliers or short-term creditors are now funding 51% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On Sany Heavy Equipment International Holdings' ROCE

Long story short, we're delighted to see that Sany Heavy Equipment International Holdings' reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 1 warning sign for Sany Heavy Equipment International Holdings you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.