What trends should we look for if we are to identify stocks that can multiply in value over the long term? First, we would like to identify a growth to recover on capital employed (ROCE) and at the same time, a based capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. In light of this, when we looked at Yangzijiang Shipbuilding (holdings) (SGX: BS6) and its ROCE trend, we weren’t exactly thrilled.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on Yangzijiang Shipbuilding (Holdings) is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.087 = CN ¥ 3.3b ÷ (CN ¥ 47b – CN ¥ 9.1b) (Based on the last twelve months up to June 2021).
So, Yangzijiang Shipbuilding (Holdings) has a ROCE of 8.7%. In absolute terms, that’s a low return, but it’s way better than the machinery industry average of 5.5%.
Check out our latest review for Yangzijiang Shipbuilding (Holdings)
Above, you can see how Yangzijiang Shipbuilding (Holdings) ‘current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you want, you can view analyst forecasts covering Yangzijiang Shipbuilding (Holdings) here for free.
So, how is the ROCE of Yangzijiang Shipbuilding (Holdings) evolving?
There are better returns on capital there than what we see at Yangzijiang Shipbuilding (Holdings). The company has employed 27% more capital over the past five years and returns on that capital have remained stable at 8.7%. Since the company has increased the amount of capital used, it seems that the investments that have been made are simply not providing a high return on capital.
The key to take away
In short, while Yangzijiang Shipbuilding (Holdings) has reinvested its capital, the returns it generates have not increased. Investors must think there are better things to come because the stock took it out of the park, offering a 119% gain to shareholders who have owned in the past five years. However, unless these underlying trends turn more positive, our hopes would not be too high.
On a separate note, we have found 2 warning signs for Yangzijiang Shipbuilding (Holdings) you will probably want to know more.
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