East China Engineering Science and Technology's (SZSE:002140) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at East China Engineering Science and Technology (SZSE:002140) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. 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)

0.077 = CN¥506m ÷ (CN¥16b - CN¥9.8b) (Based on the trailing twelve months to December 2024).

So, East China Engineering Science and Technology has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 6.2% generated by the Construction industry, it's much better.

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

So How Is East China Engineering Science and Technology's ROCE Trending?

The returns on capital haven't changed much for East China Engineering Science and Technology in recent years. The company has consistently earned 7.7% for the last five years, and the capital employed within the business has risen 124% in that time. 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 separate but related note, it's important to know that East China Engineering Science and Technology has a current liabilities to total assets ratio of 60%, which we'd consider pretty high. 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

As we've seen above, East China Engineering Science and Technology's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 82% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 1 warning sign facing East China Engineering Science and Technology that you might find interesting.

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.