Capital Allocation Trends At Zhejiang XiaSha Precision Manufacturing (SZSE:001306) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Zhejiang XiaSha Precision Manufacturing (SZSE:001306) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Zhejiang XiaSha Precision Manufacturing is:

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

0.036 = CN¥55m ÷ (CN¥1.8b - CN¥340m) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang XiaSha Precision Manufacturing has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.4%.

Check out our latest analysis for Zhejiang XiaSha Precision Manufacturing

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

The Trend Of ROCE

In terms of Zhejiang XiaSha Precision Manufacturing's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 3.6% from 16% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Zhejiang XiaSha Precision Manufacturing has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Zhejiang XiaSha Precision Manufacturing's ROCE

While returns have fallen for Zhejiang XiaSha Precision Manufacturing in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 21% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Zhejiang XiaSha Precision Manufacturing, we've spotted 2 warning signs, and 1 of them is concerning.

While Zhejiang XiaSha Precision Manufacturing isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.