Here's What's Concerning About Ningbo Sinyuan Zm Technology's (SZSE:301398) Returns On 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Ningbo Sinyuan Zm Technology (SZSE:301398) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Ningbo Sinyuan Zm Technology:

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

0.059 = CN¥62m ÷ (CN¥1.1b - CN¥54m) (Based on the trailing twelve months to September 2023).

So, Ningbo Sinyuan Zm Technology has an ROCE of 5.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

View our latest analysis for Ningbo Sinyuan Zm Technology

Above you can see how the current ROCE for Ningbo Sinyuan Zm Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ningbo Sinyuan Zm Technology for free.

How Are Returns Trending?

When we looked at the ROCE trend at Ningbo Sinyuan Zm Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Ningbo Sinyuan Zm Technology has decreased its current liabilities to 4.9% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Ningbo Sinyuan Zm Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ningbo Sinyuan Zm Technology. And the stock has followed suit returning a meaningful 26% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

Ningbo Sinyuan Zm Technology does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.

While Ningbo Sinyuan Zm Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.