Returns On Capital At EVA Precision Industrial Holdings (HKG:838) Have Hit The Brakes

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. In light of that, when we looked at EVA Precision Industrial Holdings (HKG:838) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 EVA Precision Industrial Holdings, this is the formula:

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

0.065 = HK$285m ÷ (HK$7.3b - HK$2.9b) (Based on the trailing twelve months to December 2022).

So, EVA Precision Industrial Holdings has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Machinery industry average of 7.0%.

See our latest analysis for EVA Precision Industrial Holdings

In the above chart we have measured EVA Precision Industrial Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering EVA Precision Industrial Holdings here for free.

SWOT Analysis for EVA Precision Industrial Holdings

What Can We Tell From EVA Precision Industrial Holdings' ROCE Trend?

In terms of EVA Precision Industrial Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.5% for the last five years, and the capital employed within the business has risen 42% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On EVA Precision Industrial Holdings' ROCE

In conclusion, EVA Precision Industrial Holdings has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 2.2% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 1 warning sign for EVA Precision Industrial Holdings that we think 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.