Be Wary Of Foshan Golden Milky Way Intelligent Equipment (SZSE:300619) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Foshan Golden Milky Way Intelligent Equipment (SZSE:300619) and its ROCE trend, we weren't exactly thrilled.

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 Foshan Golden Milky Way Intelligent Equipment is:

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

0.014 = CN¥29m ÷ (CN¥4.3b - CN¥2.2b) (Based on the trailing twelve months to September 2024).

Thus, Foshan Golden Milky Way Intelligent Equipment has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

See our latest analysis for Foshan Golden Milky Way Intelligent Equipment

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Foshan Golden Milky Way Intelligent Equipment has performed in the past in other metrics, you can view this free graph of Foshan Golden Milky Way Intelligent Equipment's past earnings, revenue and cash flow.

How Are Returns Trending?

We weren't thrilled with the trend because Foshan Golden Milky Way Intelligent Equipment's ROCE has reduced by 86% over the last five years, while the business employed 200% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Foshan Golden Milky Way Intelligent Equipment's earnings and if they change as a result from the capital raise.

On a side note, Foshan Golden Milky Way Intelligent Equipment's current liabilities have increased over the last five years to 52% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Foshan Golden Milky Way Intelligent Equipment have fallen, meanwhile the business is employing more capital than it was five years ago. Despite the concerning underlying trends, the stock has actually gained 33% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 3 warning signs for Foshan Golden Milky Way Intelligent Equipment (2 are a bit unpleasant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.