Shandong Golden Empire Precision Machinery Technology (SHSE:603270) Is Reinvesting At Lower Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shandong Golden Empire Precision Machinery Technology (SHSE:603270), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shandong Golden Empire Precision Machinery Technology is:

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

0.02 = CN¥50m ÷ (CN¥3.1b - CN¥678m) (Based on the trailing twelve months to September 2024).

Thus, Shandong Golden Empire Precision Machinery Technology has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

View our latest analysis for Shandong Golden Empire Precision Machinery Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Golden Empire Precision Machinery Technology's ROCE against it's prior returns. If you'd like to look at how Shandong Golden Empire Precision Machinery Technology has performed in the past in other metrics, you can view this free graph of Shandong Golden Empire Precision Machinery Technology's past earnings, revenue and cash flow.

What Can We Tell From Shandong Golden Empire Precision Machinery Technology's ROCE Trend?

On the surface, the trend of ROCE at Shandong Golden Empire Precision Machinery Technology doesn't inspire confidence. Around four years ago the returns on capital were 18%, but since then they've fallen to 2.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 related note, Shandong Golden Empire Precision Machinery Technology has decreased its current liabilities to 22% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Shandong Golden Empire Precision Machinery Technology's ROCE

To conclude, we've found that Shandong Golden Empire Precision Machinery Technology is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 33% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Shandong Golden Empire Precision Machinery Technology we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.