If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Avary Holding(Shenzhen)Co (SZSE:002938) and its ROCE trend, we weren't exactly thrilled.
What Is 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 Avary Holding(Shenzhen)Co, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥3.8b ÷ (CN¥41b - CN¥12b) (Based on the trailing twelve months to September 2023).
Thus, Avary Holding(Shenzhen)Co has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.0% it's much better.
See our latest analysis for Avary Holding(Shenzhen)Co
Above you can see how the current ROCE for Avary Holding(Shenzhen)Co compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Avary Holding(Shenzhen)Co's ROCE Trend?
The trend of ROCE doesn't look fantastic because it's fallen from 19% five years ago, while the business's capital employed increased by 76%. Usually this isn't ideal, but given Avary Holding(Shenzhen)Co conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Avary Holding(Shenzhen)Co might not have received a full period of earnings contribution from it.
The Bottom Line
We're a bit apprehensive about Avary Holding(Shenzhen)Co because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 32% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
On a separate note, we've found 1 warning sign for Avary Holding(Shenzhen)Co you'll probably want to know about.
While Avary Holding(Shenzhen)Co 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.