Investors Could Be Concerned With Shenzhen Etmade Automatic Equipment's (SZSE:300812) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Shenzhen Etmade Automatic Equipment (SZSE:300812) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Shenzhen Etmade Automatic Equipment is:

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

0.014 = CN¥12m ÷ (CN¥1.4b - CN¥531m) (Based on the trailing twelve months to September 2023).

Thus, Shenzhen Etmade Automatic Equipment has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 5.3%.

See our latest analysis for Shenzhen Etmade Automatic Equipment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Etmade Automatic Equipment's ROCE against it's prior returns. If you'd like to look at how Shenzhen Etmade Automatic Equipment has performed in the past in other metrics, you can view this free graph of Shenzhen Etmade Automatic Equipment's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Shenzhen Etmade Automatic Equipment's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 31%, but since then they've fallen to 1.4%. However it looks like Shenzhen Etmade Automatic Equipment might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Shenzhen Etmade Automatic Equipment has done well to pay down its current liabilities to 37% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Shenzhen Etmade Automatic Equipment's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 66% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to know some of the risks facing Shenzhen Etmade Automatic Equipment we've found 4 warning signs (3 are concerning!) that you should be aware of before investing here.

While Shenzhen Etmade Automatic Equipment 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.