Returns On Capital Signal Tricky Times Ahead For Allied Machinery (SHSE:605060)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Allied Machinery (SHSE:605060), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Allied Machinery is:

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

0.093 = CN¥217m ÷ (CN¥2.8b - CN¥424m) (Based on the trailing twelve months to September 2024).

So, Allied Machinery has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 5.2% generated by the Machinery industry, it's much better.

See our latest analysis for Allied Machinery

In the above chart we have measured Allied 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 Allied Machinery .

So How Is Allied Machinery's ROCE Trending?

On the surface, the trend of ROCE at Allied Machinery doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.3% from 24% five years ago. 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 On Allied Machinery's ROCE

Bringing it all together, while we're somewhat encouraged by Allied Machinery's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 3.5% over the last three years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a separate note, we've found 2 warning signs for Allied Machinery you'll probably want to know about.

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.