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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Metallurgical Corporation of China (HKG:1618) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for Metallurgical Corporation of China:

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

0.097 = CN¥22b ÷ (CN¥667b - CN¥444b) (Based on the trailing twelve months to June 2023).

So, Metallurgical Corporation of China has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 6.5%.

View our latest analysis for Metallurgical Corporation of China

Above you can see how the current ROCE for Metallurgical Corporation of China 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 Metallurgical Corporation of China here for free.

How Are Returns Trending?

The returns on capital haven't changed much for Metallurgical Corporation of China in recent years. The company has employed 61% more capital in the last five years, and the returns on that capital have remained stable at 9.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Metallurgical Corporation of China's current liabilities are still rather high at 67% of total assets. 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 Metallurgical Corporation of China's ROCE

Long story short, while Metallurgical Corporation of China has been reinvesting its capital, the returns that it's generating haven't increased. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Like most companies, Metallurgical Corporation of China does come with some risks, and we've found 1 warning sign that you should be aware of.

While Metallurgical Corporation of China 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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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.