Why You Should Care About Dongguan Yiheda Automation's (SZSE:301029) Strong Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Dongguan Yiheda Automation (SZSE:301029) looks attractive right now, so lets see what the trend of returns can tell us.

What Is 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. Analysts use this formula to calculate it for Dongguan Yiheda Automation:

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

0.21 = CN¥625m ÷ (CN¥3.6b - CN¥604m) (Based on the trailing twelve months to December 2023).

So, Dongguan Yiheda Automation has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Machinery industry average of 5.6%.

Check out our latest analysis for Dongguan Yiheda Automation

Above you can see how the current ROCE for Dongguan Yiheda Automation 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 Dongguan Yiheda Automation .

So How Is Dongguan Yiheda Automation's ROCE Trending?

In terms of Dongguan Yiheda Automation's history of ROCE, it's quite impressive. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 480% in that time. Now considering ROCE is an attractive 21%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

In Conclusion...

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. Despite these impressive fundamentals, the stock has collapsed 74% over the last three years, so there is likely other factors affecting the company's future prospects. That's why it's worth looking further into this stock because while these fundamentals look good, there could be other issues with the business.

If you'd like to know more about Dongguan Yiheda Automation, we've spotted 2 warning signs, and 1 of them is a bit concerning.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.