Returns On Capital At Anhui Yingliu Electromechanical (SHSE:603308) Have Hit The Brakes

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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.

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. 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)

0.043 = CN¥362m ÷ (CN¥12b - CN¥3.1b) (Based on the trailing twelve months to September 2024).

Thus, Anhui Yingliu Electromechanical has an ROCE of 4.3%. On its own, that's a low figure but it's around the 5.3% average generated by the Machinery industry.

See 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?

There are better returns on capital out there than what we're seeing at Anhui Yingliu Electromechanical. Over the past five years, ROCE has remained relatively flat at around 4.3% and the business has deployed 89% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

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 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 84% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Anhui Yingliu Electromechanical we've found 4 warning signs (1 makes us a bit uncomfortable!) 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.