Ecovacs Robotics (SHSE:603486) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Ecovacs Robotics (SHSE:603486), we don't think it's current trends fit the mold of a multi-bagger.

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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 Ecovacs Robotics, this is the formula:

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

0.068 = CN¥552m ÷ (CN¥13b - CN¥5.2b) (Based on the trailing twelve months to September 2024).

Thus, Ecovacs Robotics has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 9.7%.

See our latest analysis for Ecovacs Robotics

Above you can see how the current ROCE for Ecovacs Robotics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ecovacs Robotics for free.

The Trend Of ROCE

When we looked at the ROCE trend at Ecovacs Robotics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.8% from 12% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Ecovacs Robotics' ROCE

Bringing it all together, while we're somewhat encouraged by Ecovacs Robotics' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 235% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Ecovacs Robotics does have some risks though, and we've spotted 1 warning sign for Ecovacs Robotics that you might be interested in.

While Ecovacs Robotics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.