Zhejiang Yuejian Intelligent EquipmentLtd (SHSE:603095) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Zhejiang Yuejian Intelligent EquipmentLtd (SHSE:603095), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Zhejiang Yuejian Intelligent EquipmentLtd, this is the formula:

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

0.018 = CN¥44m ÷ (CN¥3.3b - CN¥837m) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang Yuejian Intelligent EquipmentLtd has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.2%.

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're interested in investigating Zhejiang Yuejian Intelligent EquipmentLtd's past further, check out this free graph covering Zhejiang Yuejian Intelligent EquipmentLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Zhejiang Yuejian Intelligent EquipmentLtd doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 1.8%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhejiang Yuejian Intelligent EquipmentLtd. And the stock has followed suit returning a meaningful 45% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Zhejiang Yuejian Intelligent EquipmentLtd does have some risks, we noticed 5 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Zhejiang Yuejian Intelligent EquipmentLtd 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.