Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Avary Holding(Shenzhen)Co (SZSE:002938), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Avary Holding(Shenzhen)Co is:
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 5.3% it's much better.
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 analyst report for Avary Holding(Shenzhen)Co .
The Trend Of ROCE
Unfortunately, the trend isn't great with ROCE falling from 19% five years ago, while capital employed has grown 76%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Avary Holding(Shenzhen)Co probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
Our Take On Avary Holding(Shenzhen)Co's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Avary Holding(Shenzhen)Co have fallen, meanwhile the business is employing more capital than it was five years ago. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One more thing to note, we've identified 1 warning sign with Avary Holding(Shenzhen)Co and understanding it should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.