Returns At Anhui Yingliu Electromechanical (SHSE:603308) Appear To Be Weighed Down

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Anhui Yingliu Electromechanical (SHSE:603308), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Anhui Yingliu Electromechanical is:

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

0.042 = CN¥328m ÷ (CN¥11b - CN¥2.9b) (Based on the trailing twelve months to September 2023).

Therefore, Anhui Yingliu Electromechanical has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.0%.

Check out our latest analysis for Anhui Yingliu Electromechanical

In the above chart we have measured Anhui Yingliu Electromechanical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Anhui Yingliu Electromechanical for free.

So How Is Anhui Yingliu Electromechanical's ROCE Trending?

There are better returns on capital out there than what we're seeing at Anhui Yingliu Electromechanical. The company has consistently earned 4.2% for the last five years, and the capital employed within the business has risen 105% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Anhui Yingliu Electromechanical has done well to reduce current liabilities to 27% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

In conclusion, Anhui Yingliu Electromechanical has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 60% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 3 warning signs we've spotted with Anhui Yingliu Electromechanical (including 1 which shouldn't be ignored) .

While Anhui Yingliu Electromechanical isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.