Some Investors May Be Worried About Hangzhou Youngsun Intelligent Equipment's (SHSE:603901) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Hangzhou Youngsun Intelligent Equipment (SHSE:603901), it didn't seem to tick all of these boxes.

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 Hangzhou Youngsun Intelligent Equipment:

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

0.021 = CN¥85m ÷ (CN¥7.8b - CN¥3.8b) (Based on the trailing twelve months to September 2024).

Therefore, Hangzhou Youngsun Intelligent Equipment has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

See our latest analysis for Hangzhou Youngsun Intelligent Equipment

Above you can see how the current ROCE for Hangzhou Youngsun Intelligent Equipment compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hangzhou Youngsun Intelligent Equipment .

What The Trend Of ROCE Can Tell Us

In terms of Hangzhou Youngsun Intelligent Equipment's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.2%, but since then they've fallen to 2.1%. 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 may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Hangzhou Youngsun Intelligent Equipment has a high ratio of current liabilities to total assets of 49%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Hangzhou Youngsun Intelligent Equipment's ROCE

Bringing it all together, while we're somewhat encouraged by Hangzhou Youngsun Intelligent Equipment's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 8.4% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing: We've identified 3 warning signs with Hangzhou Youngsun Intelligent Equipment (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.