What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Metallurgical Corporation of China (HKG:1618) 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)
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. Analysts use this formula to calculate it for Metallurgical Corporation of China:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = CN¥12b ÷ (CN¥756b - CN¥539b) (Based on the trailing twelve months to June 2024).
Thus, Metallurgical Corporation of China has an ROCE of 5.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.
View 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Metallurgical Corporation of China .
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Metallurgical Corporation of China doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.7% from 9.6% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.
On a separate but related note, it's important to know that Metallurgical Corporation of China has a current liabilities to total assets ratio of 71%, which we'd consider pretty high. 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
To conclude, we've found that Metallurgical Corporation of China is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 27% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Like most companies, Metallurgical Corporation of China does come with some risks, and we've found 2 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.