The Returns At Yangzijiang Shipbuilding (Holdings) (SGX:BS6) Aren't Growing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Yangzijiang Shipbuilding (Holdings) (SGX:BS6) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Yangzijiang Shipbuilding (Holdings):

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

0.099 = CN¥3.7b ÷ (CN¥48b - CN¥10b) (Based on the trailing twelve months to March 2021).

Thus, Yangzijiang Shipbuilding (Holdings) has an ROCE of 9.9%. On its own that's a low return, but compared to the average of 6.2% generated by the Machinery industry, it's much better.

View our latest analysis for Yangzijiang Shipbuilding (Holdings)

Above you can see how the current ROCE for Yangzijiang Shipbuilding (Holdings) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Yangzijiang Shipbuilding (Holdings) in recent years. Over the past five years, ROCE has remained relatively flat at around 9.9% and the business has deployed 25% more capital into its operations. 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.

The Bottom Line

As we've seen above, Yangzijiang Shipbuilding (Holdings)'s returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 87% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 2 warning signs for Yangzijiang Shipbuilding (Holdings) that we think you should be aware of.

While Yangzijiang Shipbuilding (Holdings) 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. 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.
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