Eurocrane (China) (SHSE:603966) Has Some Way To Go To Become A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Eurocrane (China) (SHSE:603966), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Eurocrane (China):

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

0.088 = CN¥186m ÷ (CN¥3.6b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

Therefore, Eurocrane (China) has an ROCE of 8.8%. On its own that's a low return, but compared to the average of 5.5% generated by the Machinery industry, it's much better.

See our latest analysis for Eurocrane (China)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Eurocrane (China) has performed in the past in other metrics, you can view this free graph of Eurocrane (China)'s past earnings, revenue and cash flow.

The Trend Of ROCE

The returns on capital haven't changed much for Eurocrane (China) in recent years. The company has consistently earned 8.8% for the last five years, and the capital employed within the business has risen 80% in that time. 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 separate but related note, it's important to know that Eurocrane (China) has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Eurocrane (China)'s ROCE

As we've seen above, Eurocrane (China)'s returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 52% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Eurocrane (China) does come with some risks, and we've found 2 warning signs that you should be aware of.

While Eurocrane (China) 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.