We Like These Underlying Return On Capital Trends At Zhongshan Broad-Ocean Motor (SZSE:002249)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Zhongshan Broad-Ocean Motor (SZSE:002249) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Zhongshan Broad-Ocean Motor is:

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

0.074 = CN¥738m ÷ (CN¥17b - CN¥6.7b) (Based on the trailing twelve months to June 2024).

So, Zhongshan Broad-Ocean Motor has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 5.9%.

Check out our latest analysis for Zhongshan Broad-Ocean Motor

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 Zhongshan Broad-Ocean Motor.

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

We're delighted to see that Zhongshan Broad-Ocean Motor is reaping rewards from its investments and has now broken into profitability. The company now earns 7.4% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Zhongshan Broad-Ocean Motor has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Another thing to note, Zhongshan Broad-Ocean Motor has a high ratio of current liabilities to total assets of 40%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Zhongshan Broad-Ocean Motor's ROCE

In summary, we're delighted to see that Zhongshan Broad-Ocean Motor has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 46% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Zhongshan Broad-Ocean Motor you'll probably want to know about.

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.