Be Wary Of Zhejiang Baida Precision Manufacturing (SHSE:603331) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Zhejiang Baida Precision Manufacturing (SHSE:603331) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Zhejiang Baida Precision Manufacturing, this is the formula:

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

0.075 = CN¥143m ÷ (CN¥3.1b - CN¥1.2b) (Based on the trailing twelve months to June 2024).

Thus, Zhejiang Baida Precision Manufacturing has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 5.4% generated by the Machinery industry, it's much better.

Check out our latest analysis for Zhejiang Baida Precision Manufacturing

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 Baida Precision Manufacturing.

What Does the ROCE Trend For Zhejiang Baida Precision Manufacturing Tell Us?

On the surface, the trend of ROCE at Zhejiang Baida Precision Manufacturing doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 7.5%. However it looks like Zhejiang Baida Precision Manufacturing might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Zhejiang Baida Precision Manufacturing's ROCE

To conclude, we've found that Zhejiang Baida Precision Manufacturing is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 10% in the last five years. Therefore based on the analysis done in this article, we don't think Zhejiang Baida Precision Manufacturing has the makings of a multi-bagger.

Zhejiang Baida Precision Manufacturing does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.