Returns Are Gaining Momentum At Yuhuan CNC Machine ToolLtd (SZSE:002903)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Yuhuan CNC Machine ToolLtd (SZSE:002903) so let's look a bit deeper.

Understanding 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 Yuhuan CNC Machine ToolLtd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.015 = CN¥12m ÷ (CN¥1.1b - CN¥239m) (Based on the trailing twelve months to June 2024).

So, Yuhuan CNC Machine ToolLtd has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

View our latest analysis for Yuhuan CNC Machine ToolLtd

Above you can see how the current ROCE for Yuhuan CNC Machine ToolLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Yuhuan CNC Machine ToolLtd for free.

The Trend Of ROCE

Yuhuan CNC Machine ToolLtd has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.5% which is a sight for sore eyes. Not only that, but the company is utilizing 34% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 23% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

In Conclusion...

Long story short, we're delighted to see that Yuhuan CNC Machine ToolLtd's reinvestment activities have paid off and the company is now profitable. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching Yuhuan CNC Machine ToolLtd, you might be interested to know about the 5 warning signs that our analysis has discovered.

While Yuhuan CNC Machine ToolLtd 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.