Investors Could Be Concerned With Shenzhen Zhaowei Machinery & Electronics' (SZSE:003021) Returns On Capital

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 investigating Shenzhen Zhaowei Machinery & Electronics (SZSE:003021), 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. The formula for this calculation on Shenzhen Zhaowei Machinery & Electronics is:

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

0.036 = CN¥115m ÷ (CN¥3.8b - CN¥610m) (Based on the trailing twelve months to June 2024).

So, Shenzhen Zhaowei Machinery & Electronics has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.9%.

Check out our latest analysis for Shenzhen Zhaowei Machinery & Electronics

Above you can see how the current ROCE for Shenzhen Zhaowei Machinery & Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Shenzhen Zhaowei Machinery & Electronics .

What Can We Tell From Shenzhen Zhaowei Machinery & Electronics' ROCE Trend?

In terms of Shenzhen Zhaowei Machinery & Electronics' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.6% from 51% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Shenzhen Zhaowei Machinery & Electronics has decreased its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. 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

While returns have fallen for Shenzhen Zhaowei Machinery & Electronics in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Shenzhen Zhaowei Machinery & Electronics does have some risks though, and we've spotted 1 warning sign for Shenzhen Zhaowei Machinery & Electronics that you might be interested in.

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.