Chongqing Zongshen Power MachineryLtd (SZSE:001696) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Chongqing Zongshen Power MachineryLtd (SZSE:001696), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Chongqing Zongshen Power MachineryLtd:

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

0.054 = CN¥379m ÷ (CN¥9.7b - CN¥2.6b) (Based on the trailing twelve months to September 2023).

Therefore, Chongqing Zongshen Power MachineryLtd has an ROCE of 5.4%. On its own, that's a low figure but it's around the 5.8% average generated by the Auto Components industry.

Check out our latest analysis for Chongqing Zongshen Power MachineryLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chongqing Zongshen Power MachineryLtd's ROCE against it's prior returns. If you're interested in investigating Chongqing Zongshen Power MachineryLtd's past further, check out this free graph covering Chongqing Zongshen Power MachineryLtd's past earnings, revenue and cash flow.

What Can We Tell From Chongqing Zongshen Power MachineryLtd's ROCE Trend?

When we looked at the ROCE trend at Chongqing Zongshen Power MachineryLtd, we didn't gain much confidence. Around five years ago the returns on capital were 9.9%, but since then they've fallen to 5.4%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

In summary, we're somewhat concerned by Chongqing Zongshen Power MachineryLtd's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 20% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we've found 1 warning sign for Chongqing Zongshen Power MachineryLtd that we think 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.