Returns On Capital At Zhejiang Sling Automobile Bearing (SZSE:301550) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Sling Automobile Bearing (SZSE:301550) 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 Sling Automobile Bearing, this is the formula:

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

0.094 = CN¥161m ÷ (CN¥2.1b - CN¥385m) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang Sling Automobile Bearing has an ROCE of 9.4%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 7.0%.

View our latest analysis for Zhejiang Sling Automobile Bearing

In the above chart we have measured Zhejiang Sling Automobile Bearing's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Sling Automobile Bearing for free.

What Can We Tell From Zhejiang Sling Automobile Bearing's ROCE Trend?

There are better returns on capital out there than what we're seeing at Zhejiang Sling Automobile Bearing. Over the past five years, ROCE has remained relatively flat at around 9.4% and the business has deployed 650% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Zhejiang Sling Automobile Bearing has done well to reduce current liabilities to 18% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

Long story short, while Zhejiang Sling Automobile Bearing has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 250% return in the last year, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Zhejiang Sling Automobile Bearing, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Zhejiang Sling Automobile Bearing 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.