Zhongyeda Electric (SZSE:002441) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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 briefly looking over the numbers, we don't think Zhongyeda Electric (SZSE:002441) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Zhongyeda Electric:

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

0.055 = CN¥263m ÷ (CN¥6.9b - CN¥2.1b) (Based on the trailing twelve months to March 2024).

Thus, Zhongyeda Electric has an ROCE of 5.5%. On its own, that's a low figure but it's around the 6.1% average generated by the Trade Distributors industry.

Check out our latest analysis for Zhongyeda Electric

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'd like to look at how Zhongyeda Electric has performed in the past in other metrics, you can view this free graph of Zhongyeda Electric's past earnings, revenue and cash flow.

So How Is Zhongyeda Electric's ROCE Trending?

When we looked at the ROCE trend at Zhongyeda Electric, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.5% from 7.6% five years ago. However it looks like Zhongyeda Electric 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.

Our Take On Zhongyeda Electric's ROCE

To conclude, we've found that Zhongyeda Electric is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 17% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know about the risks facing Zhongyeda Electric, we've discovered 1 warning sign that you should be aware of.

While Zhongyeda Electric 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.