There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, from a first glance at Sany Heavy IndustryLtd (SHSE:600031) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for Sany Heavy IndustryLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = CN¥6.3b ÷ (CN¥154b - CN¥60b) (Based on the trailing twelve months to September 2023).
Thus, Sany Heavy IndustryLtd has an ROCE of 6.6%. On its own, that's a low figure but it's around the 6.0% average generated by the Machinery industry.
In the above chart we have measured Sany Heavy IndustryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sany Heavy IndustryLtd for free.
What Does the ROCE Trend For Sany Heavy IndustryLtd Tell Us?
When we looked at the ROCE trend at Sany Heavy IndustryLtd, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 6.6%. However it looks like Sany Heavy IndustryLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by Sany Heavy IndustryLtd's 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 18% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Sany Heavy IndustryLtd does have some risks though, and we've spotted 1 warning sign for Sany Heavy IndustryLtd that you might be interested in.
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.
