Returns Are Gaining Momentum At Eastcompeace TechnologyLtd (SZSE:002017)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Eastcompeace TechnologyLtd (SZSE:002017) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Eastcompeace TechnologyLtd is:

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

0.086 = CN¥152m ÷ (CN¥3.0b - CN¥1.3b) (Based on the trailing twelve months to March 2024).

Therefore, Eastcompeace TechnologyLtd has an ROCE of 8.6%. In absolute terms, that's a low return, but it's much better than the Tech industry average of 5.3%.

Check out our latest analysis for Eastcompeace TechnologyLtd

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

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.6%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 21%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 42% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Eastcompeace TechnologyLtd's ROCE

All in all, it's terrific to see that Eastcompeace TechnologyLtd is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 19% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 1 warning sign for Eastcompeace TechnologyLtd that we think you should be aware of.

While Eastcompeace TechnologyLtd 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.