If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at China Railway Construction Heavy Industry (SHSE:688425), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for China Railway Construction Heavy Industry:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = CN¥1.7b ÷ (CN¥26b - CN¥8.0b) (Based on the trailing twelve months to December 2023).
So, China Railway Construction Heavy Industry has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 6.0%.
In the above chart we have measured China Railway Construction Heavy Industry's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Railway Construction Heavy Industry .
What Does the ROCE Trend For China Railway Construction Heavy Industry Tell Us?
When we looked at the ROCE trend at China Railway Construction Heavy Industry, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.9% from 18% five years ago. However it looks like China Railway Construction Heavy Industry 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 may take some time before the company starts to see any change in earnings from these investments.
Our Take On China Railway Construction Heavy Industry's ROCE
To conclude, we've found that China Railway Construction Heavy Industry is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 29% in the last year. 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.
One more thing, we've spotted 1 warning sign facing China Railway Construction Heavy Industry that you might find interesting.
While China Railway Construction Heavy Industry 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.