East China Engineering Science and Technology (SZSE:002140) Has Some Way To Go To Become A Multi-Bagger

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at East China Engineering Science and Technology (SZSE:002140) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for East China Engineering Science and Technology:

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

0.072 = CN¥406m ÷ (CN¥16b - CN¥10.0b) (Based on the trailing twelve months to March 2024).

Thus, East China Engineering Science and Technology has an ROCE of 7.2%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

See our latest analysis for East China Engineering Science and Technology

In the above chart we have measured East China Engineering Science and Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for East China Engineering Science and Technology .

What Can We Tell From East China Engineering Science and Technology's ROCE Trend?

In terms of East China Engineering Science and Technology's historical ROCE trend, it doesn't exactly demand attention. The company has employed 97% more capital in the last five years, and the returns on that capital have remained stable at 7.2%. 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.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 64% of total assets, this reported ROCE would probably be less than7.2% because total capital employed would be higher.The 7.2% ROCE could be even lower if current liabilities weren't 64% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Bottom Line

In conclusion, East China Engineering Science and Technology has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we've found 1 warning sign for East China Engineering Science and Technology that we think you should be aware of.

While East China Engineering Science and Technology 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.