If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Sichuan Kexin Mechanical and Electrical EquipmentLtd's (SZSE:300092) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Sichuan Kexin Mechanical and Electrical EquipmentLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥199m ÷ (CN¥2.4b - CN¥884m) (Based on the trailing twelve months to September 2023).
Thus, Sichuan Kexin Mechanical and Electrical EquipmentLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.1% generated by the Machinery industry.
Above you can see how the current ROCE for Sichuan Kexin Mechanical and Electrical EquipmentLtd 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 Sichuan Kexin Mechanical and Electrical EquipmentLtd .
How Are Returns Trending?
The trends we've noticed at Sichuan Kexin Mechanical and Electrical EquipmentLtd are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 170% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On Sichuan Kexin Mechanical and Electrical EquipmentLtd's ROCE
All in all, it's terrific to see that Sichuan Kexin Mechanical and Electrical EquipmentLtd is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 56% return over the last five years. 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.
One more thing: We've identified 3 warning signs with Sichuan Kexin Mechanical and Electrical EquipmentLtd (at least 1 which is significant) , and understanding these would certainly be useful.
While Sichuan Kexin Mechanical and Electrical EquipmentLtd 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.
