What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Shenzhen Everbest Machinery Industry (SZSE:002980) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. The formula for this calculation on Shenzhen Everbest Machinery Industry is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = CN¥65m ÷ (CN¥1.2b - CN¥176m) (Based on the trailing twelve months to March 2023).
So, Shenzhen Everbest Machinery Industry has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Electronic industry average of 5.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Everbest Machinery Industry's ROCE against it's prior returns. If you'd like to look at how Shenzhen Everbest Machinery Industry has performed in the past in other metrics, you can view this free graph of Shenzhen Everbest Machinery Industry's past earnings, revenue and cash flow.
What Does the ROCE Trend For Shenzhen Everbest Machinery Industry Tell Us?
In terms of Shenzhen Everbest Machinery Industry's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.2% from 27% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Key Takeaway
We're a bit apprehensive about Shenzhen Everbest Machinery Industry because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 43% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you'd like to know more about Shenzhen Everbest Machinery Industry, we've spotted 5 warning signs, and 2 of them are a bit concerning.
While Shenzhen Everbest Machinery Industry 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.