China Shanshui Cement Group (HKG:691) Could Become A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, the ROCE of China Shanshui Cement Group (HKG:691) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

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 China Shanshui Cement Group is:

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

0.30 = CN¥5.4b ÷ (CN¥28b - CN¥9.8b) (Based on the trailing twelve months to December 2020).

Therefore, China Shanshui Cement Group has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Basic Materials industry average of 16%.

Check out our latest analysis for China Shanshui Cement Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating China Shanshui Cement Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From China Shanshui Cement Group's ROCE Trend?

China Shanshui Cement Group has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 30% on its capital. And unsurprisingly, like most companies trying to break into the black, China Shanshui Cement Group is utilizing 239% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 36%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On China Shanshui Cement Group's ROCE

In summary, it's great to see that China Shanshui Cement Group has managed to break into profitability and is continuing to reinvest in its business. And given the stock has remained rather flat over the last year, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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