What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at SMARTGEN (Zhengzhou) Technology (SZSE:301361) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for SMARTGEN (Zhengzhou) Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = CN¥58m ÷ (CN¥1.1b - CN¥42m) (Based on the trailing twelve months to September 2023).
So, SMARTGEN (Zhengzhou) Technology has an ROCE of 5.5%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.
Historical performance is a great place to start when researching a stock so above you can see the gauge for SMARTGEN (Zhengzhou) Technology's ROCE against it's prior returns. If you're interested in investigating SMARTGEN (Zhengzhou) Technology's past further, check out this free graph covering SMARTGEN (Zhengzhou) Technology's past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of SMARTGEN (Zhengzhou) Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.5% from 22% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From SMARTGEN (Zhengzhou) Technology's ROCE
In summary, SMARTGEN (Zhengzhou) Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 27% in the last year. 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.
If you're still interested in SMARTGEN (Zhengzhou) Technology it's worth checking out our FREE intrinsic value approximation for 301361 to see if it's trading at an attractive price in other respects.
While SMARTGEN (Zhengzhou) Technology 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.
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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.
