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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Guangdong Yangshan United Precision Manufacturing (SZSE:001268), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Guangdong Yangshan United Precision Manufacturing:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = CN¥50m ÷ (CN¥1.2b - CN¥227m) (Based on the trailing twelve months to June 2023).
Thus, Guangdong Yangshan United Precision Manufacturing has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.4%.
Check out our latest analysis for Guangdong Yangshan United Precision Manufacturing
Historical performance is a great place to start when researching a stock so above you can see the gauge for Guangdong Yangshan United Precision Manufacturing's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Guangdong Yangshan United Precision Manufacturing, check out these free graphs here.
How Are Returns Trending?
In terms of Guangdong Yangshan United Precision Manufacturing's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 5.1% from 23% four years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, Guangdong Yangshan United Precision Manufacturing has decreased its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.
What We Can Learn From Guangdong Yangshan United Precision Manufacturing's ROCE
To conclude, we've found that Guangdong Yangshan United Precision Manufacturing is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 1.4% in the last year to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you want to know some of the risks facing Guangdong Yangshan United Precision Manufacturing we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.