Weichai Heavy Machinery (SZSE:000880) Is Doing The Right Things To Multiply Its Share Price - Simply Wall St News

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Weichai Heavy Machinery's (SZSE:000880) returns on capital, so let's have a look.

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Weichai Heavy Machinery, this is the formula:

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

0.017 = CN¥39m ÷ (CN¥5.6b - CN¥3.3b) (Based on the trailing twelve months to June 2024).

Therefore, Weichai Heavy Machinery has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.5%.

Check out our latest analysis for Weichai Heavy Machinery

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Weichai Heavy Machinery.

The fact that Weichai Heavy Machinery is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 1.7% on its capital. In addition to that, Weichai Heavy Machinery is employing 44% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, Weichai Heavy Machinery's current liabilities are still rather high at 58% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

To the delight of most shareholders, Weichai Heavy Machinery has now broken into profitability. And with a respectable 87% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Weichai Heavy Machinery can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 2 warning signs facing Weichai Heavy Machinery that you might find interesting.

While Weichai Heavy Machinery 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.

Discover if Weichai Heavy Machinery might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.

Develops, manufactures, and sells diesel engines, generating units, and power integration systems for ship power and power generation equipment in China.

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