Returns On Capital Signal Tricky Times Ahead For Zhejiang Risun Intelligent TechnologyLtd (SHSE:688215)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Zhejiang Risun Intelligent TechnologyLtd (SHSE:688215) 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?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Zhejiang Risun Intelligent TechnologyLtd, this is the formula:

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

0.04 = CN¥20m ÷ (CN¥736m - CN¥253m) (Based on the trailing twelve months to December 2023).

So, Zhejiang Risun Intelligent TechnologyLtd has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.1%.

Check out our latest analysis for Zhejiang Risun Intelligent TechnologyLtd

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

What Can We Tell From Zhejiang Risun Intelligent TechnologyLtd's ROCE Trend?

On the surface, the trend of ROCE at Zhejiang Risun Intelligent TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 34% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Zhejiang Risun Intelligent TechnologyLtd has done well to pay down its current liabilities to 34% 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.

Our Take On Zhejiang Risun Intelligent TechnologyLtd's ROCE

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 Risun Intelligent TechnologyLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 43% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Zhejiang Risun Intelligent TechnologyLtd does have some risks though, and we've spotted 2 warning signs for Zhejiang Risun Intelligent TechnologyLtd that you might be interested in.

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.