Capital Allocation Trends At Guangdong Yangshan United Precision Manufacturing (SZSE:001268) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Guangdong Yangshan United Precision Manufacturing is:

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

0.066 = CN¥67m ÷ (CN¥1.2b - CN¥216m) (Based on the trailing twelve months to June 2024).

So, Guangdong Yangshan United Precision Manufacturing has an ROCE of 6.6%. 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.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Guangdong Yangshan United Precision Manufacturing.

The Trend Of ROCE

In terms of Guangdong Yangshan United Precision Manufacturing's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.6% from 23% 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 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Guangdong Yangshan United Precision Manufacturing's ROCE

Bringing it all together, while we're somewhat encouraged by Guangdong Yangshan United Precision Manufacturing's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 44% over the last year, investors may not be too optimistic on this trend improving either. 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 more about Guangdong Yangshan United Precision Manufacturing, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

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.