Eastern's (NASDAQ:EML) Returns Have Hit A Wall
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Eastern (NASDAQ:EML), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Eastern:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$19m ÷ (US$276m - US$47m) (Based on the trailing twelve months to October 2022).
Therefore, Eastern has an ROCE of 8.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.
Check out our latest analysis for Eastern
Historical performance is a great place to start when researching a stock so above you can see the gauge for Eastern's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Eastern, check out these free graphs here.
So How Is Eastern's ROCE Trending?
The returns on capital haven't changed much for Eastern in recent years. The company has consistently earned 8.4% for the last five years, and the capital employed within the business has risen 59% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Eastern's ROCE
In summary, Eastern has simply been reinvesting capital and generating the same low rate of return as before. And in the last five years, the stock has given away 18% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Eastern (of which 1 makes us a bit uncomfortable!) that you should know about.
While Eastern may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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