Foshan Golden Milky Way Intelligent Equipment's (SZSE:300619) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Foshan Golden Milky Way Intelligent Equipment (SZSE:300619), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Foshan Golden Milky Way Intelligent Equipment, this is the formula:

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

0.062 = CN¥126m ÷ (CN¥4.5b - CN¥2.5b) (Based on the trailing twelve months to March 2024).

Thus, Foshan Golden Milky Way Intelligent Equipment has an ROCE of 6.2%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

Check out our latest analysis for Foshan Golden Milky Way Intelligent Equipment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Foshan Golden Milky Way Intelligent Equipment's ROCE against it's prior returns. 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.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 10% five years ago, while capital employed has grown 201%. That being said, Foshan Golden Milky Way Intelligent Equipment raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Foshan Golden Milky Way Intelligent Equipment might not have received a full period of earnings contribution from it.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 56%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Foshan Golden Milky Way Intelligent Equipment's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 36% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we found 6 warning signs for Foshan Golden Milky Way Intelligent Equipment (2 are significant) 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.

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