China State Construction Engineering (SHSE:601668) Hasn't Managed To Accelerate Its Returns

Simply Wall St ·  Feb 22 20:47

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating China State Construction Engineering (SHSE:601668), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on China State Construction Engineering is:

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

0.08 = CN¥101b ÷ (CN¥2.9t - CN¥1.6t) (Based on the trailing twelve months to September 2023).

Therefore, China State Construction Engineering has an ROCE of 8.0%. On its own, that's a low figure but it's around the 6.8% average generated by the Construction industry.

SHSE:601668 Return on Capital Employed February 23rd 2024

In the above chart we have measured China State Construction Engineering'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 China State Construction Engineering for free.

How Are Returns Trending?

In terms of China State Construction Engineering's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.0% for the last five years, and the capital employed within the business has risen 60% in that time. 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, China State Construction Engineering's current liabilities are still rather high at 55% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

As we've seen above, China State Construction Engineering's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 6.5% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching China State Construction Engineering, you might be interested to know about the 1 warning sign that our analysis has discovered.

While China State Construction Engineering 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.

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