Here's What's Concerning About Zhuhai CosMX Battery's (SHSE:688772) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating Zhuhai CosMX Battery (SHSE:688772), we don't think it's current trends fit the mold of a multi-bagger.

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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. Analysts use this formula to calculate it for Zhuhai CosMX Battery:

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

0.009 = CN¥116m ÷ (CN¥22b - CN¥9.0b) (Based on the trailing twelve months to December 2024).

Thus, Zhuhai CosMX Battery has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.9%.

See our latest analysis for Zhuhai CosMX Battery

Above you can see how the current ROCE for Zhuhai CosMX Battery compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zhuhai CosMX Battery for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Zhuhai CosMX Battery doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. However it looks like Zhuhai CosMX Battery 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.

On a side note, Zhuhai CosMX Battery's current liabilities are still rather high at 41% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Zhuhai CosMX Battery's ROCE

Bringing it all together, while we're somewhat encouraged by Zhuhai CosMX Battery's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 47% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Like most companies, Zhuhai CosMX Battery does come with some risks, and we've found 2 warning signs that you should be aware of.

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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.