ZHEJIANG DIBAY ELECTRICLtd (SHSE:603320) Will Want To Turn Around Its Return Trends

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. 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 ZHEJIANG DIBAY ELECTRICLtd (SHSE:603320) 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)

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 DIBAY ELECTRICLtd, this is the formula:

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

0.027 = CN¥29m ÷ (CN¥1.3b - CN¥232m) (Based on the trailing twelve months to September 2023).

So, ZHEJIANG DIBAY ELECTRICLtd has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.1%.

View our latest analysis for ZHEJIANG DIBAY ELECTRICLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of ZHEJIANG DIBAY ELECTRICLtd.

The Trend Of ROCE

When we looked at the ROCE trend at ZHEJIANG DIBAY ELECTRICLtd, we didn't gain much confidence. Around five years ago the returns on capital were 6.5%, but since then they've fallen to 2.7%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

In Conclusion...

In summary, we're somewhat concerned by ZHEJIANG DIBAY ELECTRICLtd's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 33% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with ZHEJIANG DIBAY ELECTRICLtd (including 1 which shouldn't be ignored) .

While ZHEJIANG DIBAY ELECTRICLtd 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.