The Returns On Capital At Shaanxi Zhongtian Rocket Technology (SZSE:003009) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Shaanxi Zhongtian Rocket Technology (SZSE:003009), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Shaanxi Zhongtian Rocket Technology:

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

0.037 = CN¥75m ÷ (CN¥2.9b - CN¥864m) (Based on the trailing twelve months to June 2023).

Therefore, Shaanxi Zhongtian Rocket Technology has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 5.4%.

See our latest analysis for Shaanxi Zhongtian Rocket Technology

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're interested in investigating Shaanxi Zhongtian Rocket Technology's past further, check out this free graph covering Shaanxi Zhongtian Rocket Technology's past earnings, revenue and cash flow.

What Can We Tell From Shaanxi Zhongtian Rocket Technology's ROCE Trend?

On the surface, the trend of ROCE at Shaanxi Zhongtian Rocket Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like Shaanxi Zhongtian Rocket Technology 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Shaanxi Zhongtian Rocket Technology has decreased its current liabilities to 30% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, Shaanxi Zhongtian Rocket Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 13% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Shaanxi Zhongtian Rocket Technology has the makings of a multi-bagger.

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

While Shaanxi Zhongtian Rocket Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.