There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Hangzhou Youngsun Intelligent Equipment (SHSE:603901) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Hangzhou Youngsun Intelligent Equipment:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = CN¥153m ÷ (CN¥7.0b - CN¥2.7b) (Based on the trailing twelve months to September 2023).
Therefore, Hangzhou Youngsun Intelligent Equipment has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.1%.
See our latest analysis for Hangzhou Youngsun Intelligent Equipment
In the above chart we have measured Hangzhou Youngsun Intelligent Equipment'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 report for Hangzhou Youngsun Intelligent Equipment.
The Trend Of ROCE
We weren't thrilled with the trend because Hangzhou Youngsun Intelligent Equipment's ROCE has reduced by 49% over the last five years, while the business employed 196% more capital. That being said, Hangzhou Youngsun Intelligent Equipment raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hangzhou Youngsun Intelligent Equipment's earnings and if they change as a result from the capital raise.
Our Take On Hangzhou Youngsun Intelligent Equipment's ROCE
Bringing it all together, while we're somewhat encouraged by Hangzhou Youngsun Intelligent Equipment's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 55% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you'd like to know about the risks facing Hangzhou Youngsun Intelligent Equipment, we've discovered 2 warning signs that you should be aware of.
While Hangzhou Youngsun Intelligent Equipment 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.
