East China Engineering Science and Technology (SZSE:002140) Is Doing The Right Things To Multiply Its Share Price

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, East China Engineering Science and Technology (SZSE:002140) looks quite promising in regards to its trends of return on capital.

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

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. To calculate this metric for East China Engineering Science and Technology, this is the formula:

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

0.047 = CN¥255m ÷ (CN¥14b - CN¥8.5b) (Based on the trailing twelve months to September 2023).

Thus, East China Engineering Science and Technology has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.9%.

View 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're interested, you can view the analysts predictions in our free analyst report for East China Engineering Science and Technology .

How Are Returns Trending?

East China Engineering Science and Technology has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 4.7% on its capital. In addition to that, East China Engineering Science and Technology is employing 98% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Another thing to note, East China Engineering Science and Technology has a high ratio of current liabilities to total assets of 61%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From East China Engineering Science and Technology's ROCE

In summary, it's great to see that East China Engineering Science and Technology has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 27% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a final note, we've found 2 warning signs 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.

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.