Capital Allocation Trends At Ningbo ZhongDa Leader Intelligent Transmission (SZSE:002896) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Ningbo ZhongDa Leader Intelligent Transmission (SZSE:002896), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Ningbo ZhongDa Leader Intelligent Transmission is:

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

0.055 = CN¥69m ÷ (CN¥1.6b - CN¥340m) (Based on the trailing twelve months to September 2024).

Thus, Ningbo ZhongDa Leader Intelligent Transmission has an ROCE of 5.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

View our latest analysis for Ningbo ZhongDa Leader Intelligent Transmission

In the above chart we have measured Ningbo ZhongDa Leader Intelligent Transmission's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ningbo ZhongDa Leader Intelligent Transmission .

What Can We Tell From Ningbo ZhongDa Leader Intelligent Transmission's ROCE Trend?

When we looked at the ROCE trend at Ningbo ZhongDa Leader Intelligent Transmission, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.5% from 8.3% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Ningbo ZhongDa Leader Intelligent Transmission has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Ningbo ZhongDa Leader Intelligent Transmission's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 216% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 1 warning sign facing Ningbo ZhongDa Leader Intelligent Transmission that you might find interesting.

While Ningbo ZhongDa Leader Intelligent Transmission 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.