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. 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 Yangzijiang Shipbuilding (Holdings) (SGX:BS6) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Yangzijiang Shipbuilding (Holdings), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = CN¥3.2b ÷ (CN¥52b - CN¥12b) (Based on the trailing twelve months to December 2021).
Thus, Yangzijiang Shipbuilding (Holdings) has an ROCE of 8.1%. On its own, that's a low figure but it's around the 6.8% average generated by the Machinery industry.
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'd like to see what analysts are forecasting going forward, you should check out our free report for Yangzijiang Shipbuilding (Holdings).
How Are Returns Trending?
On the surface, the trend of ROCE at Yangzijiang Shipbuilding (Holdings) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.1% from 11% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
In summary, despite lower returns in the short term, we're encouraged to see that Yangzijiang Shipbuilding (Holdings) is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 39% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
If you'd like to know about the risks facing Yangzijiang Shipbuilding (Holdings), we've discovered 2 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.