The Returns At Anhui Yingliu Electromechanical (SHSE:603308) Aren't Growing

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Anhui Yingliu Electromechanical (SHSE:603308), it didn't seem to tick all of these boxes.

What Is 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 Anhui Yingliu Electromechanical is:

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).

Therefore, Anhui Yingliu Electromechanical has an ROCE of 4.3%. In absolute terms, that's a low return but it's around the Machinery industry average of 5.2%.

View 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.

The Trend Of ROCE

In terms of Anhui Yingliu Electromechanical's historical ROCE trend, it doesn't exactly demand attention. The company has employed 89% more capital in the last five years, and the returns on that capital have remained stable at 4.3%. 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. 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 57% 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.

If you want to know some of the risks facing Anhui Yingliu Electromechanical we've found 3 warning signs (1 is potentially serious!) 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.