What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Zhejiang grandwall electric science&technologyltd (SHSE:603897) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Zhejiang grandwall electric science&technologyltd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CN¥112m ÷ (CN¥6.0b - CN¥3.3b) (Based on the trailing twelve months to September 2023).
So, Zhejiang grandwall electric science&technologyltd has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.3%.
Check out our latest analysis for Zhejiang grandwall electric science&technologyltd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang grandwall electric science&technologyltd's ROCE against it's prior returns. If you're interested in investigating Zhejiang grandwall electric science&technologyltd's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Zhejiang grandwall electric science&technologyltd's ROCE Trend?
When we looked at the ROCE trend at Zhejiang grandwall electric science&technologyltd, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like Zhejiang grandwall electric science&technologyltd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 55%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.1%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.
The Key Takeaway
In summary, Zhejiang grandwall electric science&technologyltd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a separate note, we've found 2 warning signs for Zhejiang grandwall electric science&technologyltd you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
