Some Investors May Be Worried About Zhejiang Yuejian Intelligent EquipmentLtd's (SHSE:603095) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Zhejiang Yuejian Intelligent EquipmentLtd (SHSE:603095) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Zhejiang Yuejian Intelligent EquipmentLtd:

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

0.023 = CN¥58m ÷ (CN¥3.1b - CN¥484m) (Based on the trailing twelve months to September 2023).

So, Zhejiang Yuejian Intelligent EquipmentLtd has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.0%.

Check out our latest analysis for Zhejiang Yuejian Intelligent EquipmentLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Yuejian Intelligent EquipmentLtd's ROCE against it's prior returns. If you'd like to look at how Zhejiang Yuejian Intelligent EquipmentLtd has performed in the past in other metrics, you can view this free graph of Zhejiang Yuejian Intelligent EquipmentLtd's past earnings, revenue and cash flow.

So How Is Zhejiang Yuejian Intelligent EquipmentLtd's ROCE Trending?

When we looked at the ROCE trend at Zhejiang Yuejian Intelligent EquipmentLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Zhejiang Yuejian Intelligent EquipmentLtd has done well to pay down its current liabilities to 16% 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 Zhejiang Yuejian Intelligent EquipmentLtd's ROCE

In summary, we're somewhat concerned by Zhejiang Yuejian Intelligent EquipmentLtd's diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Zhejiang Yuejian Intelligent EquipmentLtd, we've spotted 3 warning signs, and 1 of them is a bit concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.