Our Take On The Returns On Capital At Eastern (NASDAQ:EML)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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)

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. The formula for this calculation on Eastern is:

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

0.075 = US$18m ÷ (US$271m - US$33m) (Based on the trailing twelve months to October 2020).

Therefore, Eastern has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10%.

See 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.

So How Is Eastern's ROCE Trending?

The returns on capital haven't changed much for Eastern in recent years. Over the past five years, ROCE has remained relatively flat at around 7.5% and the business has deployed 121% 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

Long story short, while Eastern has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 68% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Eastern does have some risks though, and we've spotted 3 warning signs for Eastern that you might be interested in.

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.

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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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