Returns Are Gaining Momentum At Maanshan Iron & Steel (HKG:323)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Maanshan Iron & Steel (HKG:323) and its trend of ROCE, we really liked what we saw.

What is 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. To calculate this metric for Maanshan Iron & Steel, this is the formula:

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

0.11 = CN¥4.4b ÷ (CN¥87b - CN¥47b) (Based on the trailing twelve months to March 2021).

So, Maanshan Iron & Steel has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Metals and Mining industry.

View our latest analysis for Maanshan Iron & Steel

In the above chart we have measured Maanshan Iron & Steel's 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 Maanshan Iron & Steel.

So How Is Maanshan Iron & Steel's ROCE Trending?

Maanshan Iron & Steel 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 11% which is a sight for sore eyes. In addition to that, Maanshan Iron & Steel is employing 20% more capital than previously which is expected of a company that's trying to break into profitability. 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.

On a separate but related note, it's important to know that Maanshan Iron & Steel has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Maanshan Iron & Steel's ROCE

Long story short, we're delighted to see that Maanshan Iron & Steel's 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.

Maanshan Iron & Steel does have some risks though, and we've spotted 3 warning signs for Maanshan Iron & Steel that you might be interested in.

While Maanshan Iron & Steel 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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