East China Engineering Science and Technology (SZSE:002140) Has More To Do To Multiply In Value Going Forward

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 East China Engineering Science and Technology (SZSE:002140), 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. 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)

0.076 = CN¥499m ÷ (CN¥16b - CN¥9.8b) (Based on the trailing twelve months to September 2024).

Thus, East China Engineering Science and Technology has an ROCE of 7.6%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 6.1%.

Check out our latest analysis for East China Engineering Science and Technology

Above you can see how the current ROCE for East China Engineering Science and Technology 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 East China Engineering Science and Technology .

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for East China Engineering Science and Technology in recent years. Over the past five years, ROCE has remained relatively flat at around 7.6% and the business has deployed 124% more capital into its operations. 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.

On a side note, East China Engineering Science and Technology's current liabilities are still rather high at 60% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, East China Engineering Science and Technology has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 56% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 1 warning sign with East China Engineering Science and Technology and understanding this should be part of your investment process.

While East China Engineering Science and Technology 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.

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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.