- United States
Eastern (NASDAQ:EML) Hasn't Managed To Accelerate Its Returns
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, from a first glance at Eastern (NASDAQ:EML) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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. Analysts use this formula to calculate it for Eastern:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$19m ÷ (US$262m - US$47m) (Based on the trailing twelve months to December 2022).
Therefore, Eastern has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.
Check out our latest analysis for Eastern
Historical performance is a great place to start when researching a stock so above you can see the gauge for Eastern's ROCE against it's prior returns. If you're interested in investigating Eastern's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at Eastern. Over the past five years, ROCE has remained relatively flat at around 9.0% and the business has deployed 48% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line On Eastern's ROCE
Long story short, while Eastern has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 43% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Eastern (of which 1 is a bit unpleasant!) that you should know about.
While Eastern isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Valuation is complex, but we're helping make it simple.
Find out whether Eastern is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
The Eastern Company designs, manufactures, and sells engineered solutions to industrial markets in the United States and internationally.
Established dividend payer with mediocre balance sheet.