If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Zhuzhou Hongda ElectronicsLtd (SZSE:300726) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Zhuzhou Hongda ElectronicsLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = CN¥423m ÷ (CN¥5.8b - CN¥424m) (Based on the trailing twelve months to March 2024).
Therefore, Zhuzhou Hongda ElectronicsLtd has an ROCE of 7.9%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.2%.
Above you can see how the current ROCE for Zhuzhou Hongda ElectronicsLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhuzhou Hongda ElectronicsLtd .
What The Trend Of ROCE Can Tell Us
In terms of Zhuzhou Hongda ElectronicsLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line On Zhuzhou Hongda ElectronicsLtd's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Zhuzhou Hongda ElectronicsLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 11% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to continue researching Zhuzhou Hongda ElectronicsLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.
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.
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