There Are Reasons To Feel Uneasy About Leader Harmonious Drive Systems' (SHSE:688017) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Leader Harmonious Drive Systems (SHSE:688017), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Leader Harmonious Drive Systems:

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

0.017 = CN¥38m ÷ (CN¥2.7b - CN¥504m) (Based on the trailing twelve months to June 2024).

So, Leader Harmonious Drive Systems has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

Check out our latest analysis for Leader Harmonious Drive Systems

Above you can see how the current ROCE for Leader Harmonious Drive Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Leader Harmonious Drive Systems .

What Can We Tell From Leader Harmonious Drive Systems' ROCE Trend?

When we looked at the ROCE trend at Leader Harmonious Drive Systems, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.7% from 8.2% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

Our Take On Leader Harmonious Drive Systems' ROCE

Bringing it all together, while we're somewhat encouraged by Leader Harmonious Drive Systems' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 35% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Leader Harmonious Drive Systems, we've discovered 1 warning sign that you should be aware of.

While Leader Harmonious Drive Systems 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.