Zhejiang Yonggui Electric Equipment (SZSE:300351) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Zhejiang Yonggui Electric Equipment's (SZSE:300351) returns on capital, so let's have a look.

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 Zhejiang Yonggui Electric Equipment is:

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

0.026 = CN¥64m ÷ (CN¥3.2b - CN¥759m) (Based on the trailing twelve months to June 2024).

Thus, Zhejiang Yonggui Electric Equipment has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.9%.

See our latest analysis for Zhejiang Yonggui Electric Equipment

In the above chart we have measured Zhejiang Yonggui Electric Equipment'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 Zhejiang Yonggui Electric Equipment .

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Zhejiang Yonggui Electric Equipment has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.6% on its capital. While returns have increased, the amount of capital employed by Zhejiang Yonggui Electric Equipment has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 24% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

In summary, we're delighted to see that Zhejiang Yonggui Electric Equipment has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 52% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Zhejiang Yonggui Electric Equipment you'll probably want to know about.

While Zhejiang Yonggui Electric Equipment 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.