Some Investors May Be Worried About Zhejiang Jindao Technology's (SZSE:301279) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Zhejiang Jindao Technology (SZSE:301279) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Jindao Technology, this is the formula:

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

0.027 = CN¥36m ÷ (CN¥1.6b - CN¥293m) (Based on the trailing twelve months to September 2023).

Therefore, Zhejiang Jindao Technology has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 5.8%.

View our latest analysis for Zhejiang Jindao Technology

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 Jindao Technology.

So How Is Zhejiang Jindao Technology's ROCE Trending?

On the surface, the trend of ROCE at Zhejiang Jindao Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.7% from 21% five years ago. However it looks like Zhejiang Jindao Technology 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.

On a side note, Zhejiang Jindao Technology has done well to pay down its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Zhejiang Jindao Technology's ROCE

To conclude, we've found that Zhejiang Jindao Technology is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 38% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Zhejiang Jindao Technology has the makings of a multi-bagger.

One more thing, we've spotted 3 warning signs facing Zhejiang Jindao Technology that you might find interesting.

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.