What trends should we look for if we are to identify stocks that can multiply in value over the long term? First, we would like to identify a growth to return to on capital employed (ROCE) and at the same time, a based capital employed. Basically, this 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, Zhengzhou Coal Mining Machinery Group (HKG: 564) looks pretty promising when it comes to its return on capital trends.
What is Return on Employee Capital (ROCE)?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on Zhengzhou Coal Mining Machinery Group is:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.15 = CN Â¥ 3.3b Ã· (CN Â¥ 36b – CN Â¥ 13b) (Based on the last twelve months up to September 2021).
So, Zhengzhou Coal Mining Machinery Group has a ROCE of 15%. On its own, that’s a standard return, but it’s far better than the 10.0% generated by the machinery industry.
Check out our latest review for Zhengzhou Coal Mining Machinery Group
Above, you can see how Zhengzhou Coal Mining Machinery Group’s current ROCE compares to its previous returns on capital, but the past is limited. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Zhengzhou Coal Mining Machinery Group.
What the ROCE trend can tell us
It is very encouraging that Zhengzhou Coal Mining Machinery Group is now generating pre-tax profits on its previous investments. Shareholders will no doubt be delighted because the company was in deficit five years ago but now generates 15% of its capital. In addition to this, Zhengzhou Coal Mining Machinery Group employs 134% more capital than before, which is expected of a company trying to make a profit. 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.
By the way, we’ve noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Current liabilities have increased to 36% of total assets, so the company is now more funded by its suppliers or short-term creditors. Keep an eye out for future increases, because when the ratio of current liabilities to total assets becomes particularly high, it can introduce new risks to the business.
The key to take away
To the delight of most shareholders, Zhengzhou Coal Mining Machinery Group has now returned to profitability. And as the stock has performed exceptionally well over the past five years, these trends are being taken into account by investors. So, given that the stock has proven to have some promising trends, it’s worth doing more research on the company to see if these trends are likely to continue.
If you want to know more about the risks facing Zhengzhou Coal Mining Machinery Group, we found out 4 warning signs that you need to be aware of.
Although Zhengzhou Coal Mining Machinery Group does not generate the highest efficiency, check out this free list of companies that generate high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.