The Returns On Capital At Zhejiang Zhaofeng Mechanical and ElectronicLtd (SZSE:300695) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Having said that, from a first glance at Zhejiang Zhaofeng Mechanical and ElectronicLtd (SZSE:300695) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Zhejiang Zhaofeng Mechanical and ElectronicLtd, this is the formula:

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

0.049 = CN¥127m ÷ (CN¥3.0b - CN¥346m) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang Zhaofeng Mechanical and ElectronicLtd has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.0%.

Check out our latest analysis for Zhejiang Zhaofeng Mechanical and ElectronicLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Zhaofeng Mechanical and ElectronicLtd.

What Can We Tell From Zhejiang Zhaofeng Mechanical and ElectronicLtd's ROCE Trend?

In terms of Zhejiang Zhaofeng Mechanical and ElectronicLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.9% from 8.7% five years ago. However it looks like Zhejiang Zhaofeng Mechanical and ElectronicLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Zhejiang Zhaofeng Mechanical and ElectronicLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Zhejiang Zhaofeng Mechanical and ElectronicLtd does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Zhejiang Zhaofeng Mechanical and 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.