What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Metallurgical Corporation of China (HKG:1618) and its trend of ROCE, we really liked what we saw.

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 Metallurgical Corporation of China, this is the formula:

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

0.096 = CN¥19b ÷ (CN¥610b - CN¥416b) (Based on the trailing twelve months to June 2022).

Therefore, Metallurgical Corporation of China has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 6.9% generated by the Construction industry, it's much better.

See 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Metallurgical Corporation of China's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 40% more capital is being employed now too. So we're very much inspired by what we're seeing at Metallurgical Corporation of China thanks to its ability to profitably reinvest capital.

Another thing to note, Metallurgical Corporation of China has a high ratio of current liabilities to total assets of 68%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Metallurgical Corporation of China has. Astute investors may have an opportunity here because the stock has declined 28% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Metallurgical Corporation of China does have some risks though, and we've spotted 1 warning sign for Metallurgical Corporation of China that you might be interested in.

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.