Be Wary Of Guangdong Yangshan United Precision Manufacturing (SZSE:001268) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Guangdong Yangshan United Precision Manufacturing (SZSE:001268), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Guangdong Yangshan United Precision Manufacturing, this is the formula:

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

0.055 = CN¥55m ÷ (CN¥1.2b - CN¥220m) (Based on the trailing twelve months to September 2023).

Thus, Guangdong Yangshan United Precision Manufacturing has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Machinery industry average of 6.0%.

Check out our latest analysis for Guangdong Yangshan United Precision Manufacturing

Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Yangshan United Precision Manufacturing's ROCE against it's prior returns. If you'd like to look at how Guangdong Yangshan United Precision Manufacturing has performed in the past in other metrics, you can view this free graph of Guangdong Yangshan United Precision Manufacturing's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Guangdong Yangshan United Precision Manufacturing's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 24%, but since then they've fallen to 5.5%. 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.

On a side note, Guangdong Yangshan United Precision Manufacturing has done well to pay down its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Guangdong Yangshan United Precision Manufacturing's ROCE

In summary, Guangdong Yangshan United Precision Manufacturing is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 26% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you're still interested in Guangdong Yangshan United Precision Manufacturing it's worth checking out our FREE intrinsic value approximation for 001268 to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.