Zhongzhong Science & Technology (Tianjin) (SHSE:603135) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Zhongzhong Science & Technology (Tianjin) (SHSE:603135) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. To calculate this metric for Zhongzhong Science & Technology (Tianjin), this is the formula:

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

0.034 = CN¥106m ÷ (CN¥3.9b - CN¥811m) (Based on the trailing twelve months to March 2024).

So, Zhongzhong Science & Technology (Tianjin) has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.7%.

View our latest analysis for Zhongzhong Science & Technology (Tianjin)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhongzhong Science & Technology (Tianjin)'s ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhongzhong Science & Technology (Tianjin).

What Does the ROCE Trend For Zhongzhong Science & Technology (Tianjin) Tell Us?

On the surface, the trend of ROCE at Zhongzhong Science & Technology (Tianjin) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.4% from 18% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Zhongzhong Science & Technology (Tianjin) has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Zhongzhong Science & Technology (Tianjin)'s ROCE

In summary, we're somewhat concerned by Zhongzhong Science & Technology (Tianjin)'s diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 36% over the last year, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 1 warning sign for Zhongzhong Science & Technology (Tianjin) that we think you should be aware of.

While Zhongzhong Science & Technology (Tianjin) 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.