Returns at Sany Heavy Equipment International Holdings (HKG: 631) are on the rise
If you are looking for a multi-bagger, there are a few things to look out for. Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. So on that note, Sany Heavy Equipment International Holdings (HKG: 631) looks pretty promising when it comes to its return on capital trends.
Understanding Return on Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for Sany Heavy Equipment International Holdings:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.072 = CN ¥ 813m ÷ (CN ¥ 19b – CN ¥ 7.9b) (Based on the last twelve months up to June 2021).
Therefore, Sany Heavy Equipment International Holdings has a ROCE of 7.2%. In absolute terms, this is a low efficiency and it is also below the machinery industry average of 9.0%.
Check out our latest review for Sany Heavy Equipment International Holdings
Above you can see how Sany Heavy Equipment International Holdings’ current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Sany Heavy Equipment International Holdings.
What does Sany Heavy Equipment International Holdings’ ROCE trend tell us?
The fact that Sany Heavy Equipment International Holdings is now generating pre-tax profits on its past investments is very encouraging. About five years ago the company was making losses, but things have turned around as it now earns 7.2% on its equity. Not only that, but the business is using 32% more capital than before, but that’s to be expected of a business trying to achieve profitability. We like this trend because it tells us that the company has profitable reinvestment opportunities, and if it keeps moving forward it can lead to multi-bagger performance.
For the record, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially, the business now has short-term suppliers or creditors funding about 41% of its operations, which is not ideal. And with current liabilities at these levels, it’s pretty high.
In short, we are delighted to see that Sany Heavy Equipment International Holdings’ reinvestment activities have paid off and the business is now profitable. And a remarkable 815% total return over the past five years tells us that investors expect more good things to come in the future. In light of this, we think it’s worth taking a closer look at this title, because if Sany Heavy Equipment International Holdings can maintain these trends, it could have a bright future ahead of it.
If you would like to continue your research on Sany Heavy Equipment International Holdings, you may be interested in knowing the 2 warning signs that our analysis found.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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