Sany Heavy Equipment International Holdings' (HKG:631) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Sany Heavy Equipment International Holdings (HKG:631) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Sany Heavy Equipment International Holdings:

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 9.0%.

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're interested, you can view the analysts predictions in our free analyst report for Sany Heavy Equipment International Holdings .

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. To be more specific, ROCE has fallen from 9.3% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Sany Heavy Equipment International Holdings has a high ratio of current liabilities to total assets of 47%. 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.

What We Can Learn From Sany Heavy Equipment International Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Sany Heavy Equipment International Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 14% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

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.