Returns Are Gaining Momentum At Zhongshan Broad-Ocean Motor (SZSE:002249)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Zhongshan Broad-Ocean Motor (SZSE:002249) and its trend of ROCE, we really liked what we saw.

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 Zhongshan Broad-Ocean Motor, this is the formula:

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

0.052 = CN¥523m ÷ (CN¥16b - CN¥6.0b) (Based on the trailing twelve months to September 2023).

Therefore, Zhongshan Broad-Ocean Motor has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.6%.

See our latest analysis for Zhongshan Broad-Ocean Motor

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

What Can We Tell From Zhongshan Broad-Ocean Motor's ROCE Trend?

Zhongshan Broad-Ocean Motor's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 21% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line

As discussed above, Zhongshan Broad-Ocean Motor appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

Zhongshan Broad-Ocean Motor does have some risks though, and we've spotted 1 warning sign for Zhongshan Broad-Ocean Motor that you might be interested in.

While Zhongshan Broad-Ocean Motor 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.