Yields Gain Momentum at Weichai Power (HKG:2338)
When looking for a multibagger, there are a few things to look out for. First we want to identify a growing one return on the capital employed (ROCE) and then a constantly increasing one at the same time base of the capital employed. Ultimately, this shows that this is a company that reinvests profits with increasing returns. Speaking of which, we’ve noticed some great changes in Weichai Powers (HKG:2338) ROI, so let’s take a look.
Understand return on capital employed (ROCE).
For those unsure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its business. The formula for this calculation on Weichai Power is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.079 = CN¥13b ÷ (CN¥293b – CN¥131b) (Based on the last twelve months ended September 2021).
Because of this, Weichai Power has a ROCE of 7.9%. After all, that’s a low yield, below the industry average of 10.0%.
Check out our latest analysis for Weichai Power
In the chart above, we compared Weichai Power’s past ROCE to its past performance, but the future is arguably more important. If you’re interested, you can check out the forecasts from Weichai Power analysts here for free.
What can we tell from Weichai Power’s ROCE trend?
While not a high ROCE in absolute terms, it’s encouraging to see that it’s moving in the right direction. The numbers show that the return on capital employed has grown significantly to 7.9% over the past five years. The company is effectively making more money per dollar of capital employed, and it’s worth noting that the amount of capital has also increased by 102%. So we’re very inspired by what we’re seeing at Weichai Power, thanks to its ability to reinvest capital profitably.
That being said, it’s important to note that Weichai Power has a current debt to total assets ratio of 45%, which we’d think is pretty high. This can pose some risks as the company basically operates with a fairly large reliance on its suppliers or other short-term creditors. Ideally we would like to see this reduction as it would mean less risky commitments.
Our look at Weichai Power’s ROCE
In summary, Weichai Power has proven that it can reinvest in the business and generate higher returns on invested capital, which is great. With the stock returning a staggering 184% to shareholders over the past five years, it looks like investors are recognizing those shifts. That being said, we still believe the promising fundamentals mean the company deserves further due diligence.
If you’re interested in exploring Weichai Power further, you may be interested in learning more about it 2 warning signs which our analysis revealed.
If you want to look for solid companies with great earnings, check this out for free List of companies with strong balance sheets and impressive returns on equity.
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