Returns On Capital At Anhui Yingliu Electromechanical (SHSE:603308) Have Stalled

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Anhui Yingliu Electromechanical (SHSE:603308), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Anhui Yingliu Electromechanical:

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

0.046 = CN¥367m ÷ (CN¥11b - CN¥3.1b) (Based on the trailing twelve months to March 2024).

Thus, Anhui Yingliu Electromechanical has an ROCE of 4.6%. On its own, that's a low figure but it's around the 5.6% average generated by the Machinery industry.

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.

How Are Returns Trending?

In terms of Anhui Yingliu Electromechanical's historical ROCE trend, it doesn't exactly demand attention. The company has employed 88% more capital in the last five years, and the returns on that capital have remained stable at 4.6%. 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 28% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Anhui Yingliu Electromechanical's ROCE

In summary, Anhui Yingliu Electromechanical has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 94% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Anhui Yingliu Electromechanical we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Anhui Yingliu Electromechanical 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.

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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.

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