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. 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 Zhejiang Zhaofeng Mechanical and ElectronicLtd (SZSE:300695), it didn't seem to tick all of these boxes.
What Is 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. To calculate this metric for Zhejiang Zhaofeng Mechanical and ElectronicLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = CN¥101m ÷ (CN¥3.1b - CN¥491m) (Based on the trailing twelve months to September 2023).
So, Zhejiang Zhaofeng Mechanical and ElectronicLtd has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.0%.
See our latest analysis for Zhejiang Zhaofeng Mechanical and ElectronicLtd
Above you can see how the current ROCE for Zhejiang Zhaofeng Mechanical and ElectronicLtd 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 Does the ROCE Trend For Zhejiang Zhaofeng Mechanical and ElectronicLtd Tell Us?
In terms of Zhejiang Zhaofeng Mechanical and ElectronicLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Zhaofeng Mechanical and ElectronicLtd is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 5.5% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
If you're still interested in Zhejiang Zhaofeng Mechanical and ElectronicLtd it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While Zhejiang Zhaofeng Mechanical and ElectronicLtd 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.
