Zhejiang Liming Intelligent ManufacturingLtd's (SHSE:603048) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to 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. However, after briefly looking over the numbers, we don't think Zhejiang Liming Intelligent ManufacturingLtd (SHSE:603048) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Zhejiang Liming Intelligent ManufacturingLtd is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.055 = CN¥75m ÷ (CN¥1.7b - CN¥297m) (Based on the trailing twelve months to March 2024).

Therefore, Zhejiang Liming Intelligent ManufacturingLtd has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.4%.

See our latest analysis for Zhejiang Liming Intelligent ManufacturingLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Liming Intelligent ManufacturingLtd's ROCE against it's prior returns. If you'd like to look at how Zhejiang Liming Intelligent ManufacturingLtd has performed in the past in other metrics, you can view this free graph of Zhejiang Liming Intelligent ManufacturingLtd's past earnings, revenue and cash flow.

So How Is Zhejiang Liming Intelligent ManufacturingLtd's ROCE Trending?

In terms of Zhejiang Liming Intelligent ManufacturingLtd's historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 20%, but since then they've fallen to 5.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Zhejiang Liming Intelligent ManufacturingLtd has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Liming Intelligent ManufacturingLtd is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 1.1% over the last year. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 3 warning signs for Zhejiang Liming Intelligent ManufacturingLtd (2 are a bit concerning) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.