Be Wary Of Ebang International Holdings (NASDAQ:EBON) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Ebang International Holdings (NASDAQ:EBON) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Ebang International Holdings, this is the formula:

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

0.0055 = US$2.0m ÷ (US$386m - US$15m) (Based on the trailing twelve months to December 2021).

Thus, Ebang International Holdings has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Tech industry average of 11%.

Check out our latest analysis for Ebang International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ebang International Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Ebang International Holdings, check out these free graphs here.

How Are Returns Trending?

In terms of Ebang International Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.7%, but since then they've fallen to 0.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Ebang International Holdings has done well to pay down its current liabilities to 3.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ebang International Holdings. But since the stock has dived 83% in the last year, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

Ebang International Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

While Ebang International 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. 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.