Returns On Capital Are Showing Encouraging Signs At Sany Heavy Equipment International Holdings (HKG:631)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 when we looked at Sany Heavy Equipment International Holdings (HKG:631) and its trend of ROCE, we really liked what we saw.

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

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. To calculate this metric for Sany Heavy Equipment International Holdings, this is the formula:

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

0.098 = CN¥1.1b ÷ (CN¥19b - CN¥7.9b) (Based on the trailing twelve months to September 2021).

So, Sany Heavy Equipment International Holdings has an ROCE of 9.8%. Even though it's in line with the industry average of 10.0%, it's still a low return by itself.

View our latest analysis for Sany Heavy Equipment International Holdings

Above you can see how the current ROCE for Sany Heavy Equipment International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sany Heavy Equipment International Holdings here for free.

What Does the ROCE Trend For Sany Heavy Equipment International Holdings Tell Us?

The fact that Sany Heavy Equipment International Holdings is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 9.8% on its capital. In addition to that, Sany Heavy Equipment International Holdings is employing 32% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

To the delight of most shareholders, Sany Heavy Equipment International Holdings has now broken into profitability. Since the stock has returned a staggering 594% 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 Sany Heavy Equipment International Holdings can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Sany Heavy Equipment International Holdings, we've discovered 2 warning signs that 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.