Zhejiang Asia-Pacific Mechanical & ElectronicLtd (SZSE:002284) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Zhejiang Asia-Pacific Mechanical & ElectronicLtd's (SZSE:002284) returns on capital, so let's have a look.

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. To calculate this metric for Zhejiang Asia-Pacific Mechanical & ElectronicLtd, this is the formula:

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

0.051 = CN¥153m ÷ (CN¥6.4b - CN¥3.3b) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang Asia-Pacific Mechanical & ElectronicLtd has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.9%.

See our latest analysis for Zhejiang Asia-Pacific Mechanical & ElectronicLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Asia-Pacific Mechanical & ElectronicLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Asia-Pacific Mechanical & ElectronicLtd.

What Does the ROCE Trend For Zhejiang Asia-Pacific Mechanical & ElectronicLtd Tell Us?

You'd find it hard not to be impressed with the ROCE trend at Zhejiang Asia-Pacific Mechanical & ElectronicLtd. The figures show that over the last five years, returns on capital have grown by 786%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Zhejiang Asia-Pacific Mechanical & ElectronicLtd appears to been achieving more with less, since the business is using 21% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 53% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Zhejiang Asia-Pacific Mechanical & ElectronicLtd's ROCE

In the end, Zhejiang Asia-Pacific Mechanical & ElectronicLtd has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 56% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Zhejiang Asia-Pacific Mechanical & ElectronicLtd can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Zhejiang Asia-Pacific Mechanical & ElectronicLtd, we've discovered 1 warning sign that you should be aware of.

While Zhejiang Asia-Pacific Mechanical & ElectronicLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.