Ningbo ZhongDa Leader Intelligent Transmission (SZSE:002896) Is Reinvesting At Lower Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Ningbo ZhongDa Leader Intelligent Transmission (SZSE:002896) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Ningbo ZhongDa Leader Intelligent Transmission:

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

0.05 = CN¥62m ÷ (CN¥1.6b - CN¥377m) (Based on the trailing twelve months to March 2024).

Thus, Ningbo ZhongDa Leader Intelligent Transmission has an ROCE of 5.0%. On its own, that's a low figure but it's around the 6.0% average generated by the Electrical industry.

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 Does the ROCE Trend For Ningbo ZhongDa Leader Intelligent Transmission Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 12% five years ago, while capital employed has grown 96%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Ningbo ZhongDa Leader Intelligent Transmission might not have received a full period of earnings contribution from it.

On a related note, Ningbo ZhongDa Leader Intelligent Transmission has decreased its current liabilities to 23% 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.

What We Can Learn From Ningbo ZhongDa Leader Intelligent Transmission's ROCE

While returns have fallen for Ningbo ZhongDa Leader Intelligent Transmission in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 86% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing to note, we've identified 1 warning sign with Ningbo ZhongDa Leader Intelligent Transmission and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.