Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Anhui Yingliu Electromechanical (SHSE:603308), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Anhui Yingliu Electromechanical, this is the formula:

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

0.042 = CN¥328m ÷ (CN¥11b - CN¥2.9b) (Based on the trailing twelve months to September 2023).

Therefore, Anhui Yingliu Electromechanical has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.1%.

In the above chart we have measured Anhui Yingliu Electromechanical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Anhui Yingliu Electromechanical .

What Can We Tell From Anhui Yingliu Electromechanical's ROCE Trend?

The returns on capital haven't changed much for Anhui Yingliu Electromechanical in recent years. The company has consistently earned 4.2% for the last five years, and the capital employed within the business has risen 105% in that time. 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 27% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Anhui Yingliu Electromechanical's ROCE

In conclusion, Anhui Yingliu Electromechanical has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 69% 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.

If you'd like to know more about Anhui Yingliu Electromechanical, we've spotted 3 warning signs, and 1 of them is concerning.

While Anhui Yingliu Electromechanical may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.