Returns Are Gaining Momentum At Zhuhai Enpower ElectricLtd (SZSE:300681)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Zhuhai Enpower ElectricLtd (SZSE:300681) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Zhuhai Enpower ElectricLtd:

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

0.011 = CN¥28m ÷ (CN¥4.5b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

So, Zhuhai Enpower ElectricLtd has an ROCE of 1.1%. 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 Zhuhai Enpower ElectricLtd

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

What The Trend Of ROCE Can Tell Us

We're delighted to see that Zhuhai Enpower ElectricLtd is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 1.1% which is a sight for sore eyes. In addition to that, Zhuhai Enpower ElectricLtd is employing 262% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 42% 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 Zhuhai Enpower ElectricLtd's ROCE

Long story short, we're delighted to see that Zhuhai Enpower ElectricLtd's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 111% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Zhuhai Enpower ElectricLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

While Zhuhai Enpower ElectricLtd 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.