Returns On Capital Signal Tricky Times Ahead For Zhejiang Chint Electrics (SHSE:601877)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Zhejiang Chint Electrics (SHSE:601877), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Zhejiang Chint Electrics:

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

0.092 = CN¥7.0b ÷ (CN¥122b - CN¥47b) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang Chint Electrics has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 6.0% generated by the Electrical industry, it's much better.

See our latest analysis for Zhejiang Chint Electrics

Above you can see how the current ROCE for Zhejiang Chint Electrics compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Chint Electrics .

How Are Returns Trending?

On the surface, the trend of ROCE at Zhejiang Chint Electrics doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 9.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Chint Electrics is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 10% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Zhejiang Chint Electrics, we've discovered 2 warning signs that you should be aware of.

While Zhejiang Chint Electrics 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com