The Returns On Capital At Yantai Eddie Precision Machinery (SHSE:603638) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Yantai Eddie Precision Machinery (SHSE:603638) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Yantai Eddie Precision Machinery:

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

0.082 = CN¥351m ÷ (CN¥5.8b - CN¥1.6b) (Based on the trailing twelve months to September 2023).

Therefore, Yantai Eddie Precision Machinery has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 6.0%.

Check out our latest analysis for Yantai Eddie Precision Machinery

In the above chart we have measured Yantai Eddie Precision Machinery's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Yantai Eddie Precision Machinery .

What Does the ROCE Trend For Yantai Eddie Precision Machinery Tell Us?

On the surface, the trend of ROCE at Yantai Eddie Precision Machinery doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 8.2%. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Yantai Eddie Precision Machinery's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 59% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Yantai Eddie Precision Machinery does come with some risks, and we've found 1 warning sign that you should be aware of.

While Yantai Eddie Precision Machinery 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.