Zhejiang Zhaolong Interconnect TechnologyLtd (SZSE:300913) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Zhejiang Zhaolong Interconnect TechnologyLtd (SZSE:300913) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhejiang Zhaolong Interconnect TechnologyLtd:

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

0.063 = CN¥71m ÷ (CN¥1.3b - CN¥184m) (Based on the trailing twelve months to June 2024).

Therefore, Zhejiang Zhaolong Interconnect TechnologyLtd has an ROCE of 6.3%. Even though it's in line with the industry average of 5.9%, it's still a low return by itself.

See our latest analysis for Zhejiang Zhaolong Interconnect TechnologyLtd

Above you can see how the current ROCE for Zhejiang Zhaolong Interconnect TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Zhaolong Interconnect TechnologyLtd .

How Are Returns Trending?

We weren't thrilled with the trend because Zhejiang Zhaolong Interconnect TechnologyLtd's ROCE has reduced by 75% over the last five years, while the business employed 247% more capital. That being said, Zhejiang Zhaolong Interconnect TechnologyLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Zhejiang Zhaolong Interconnect TechnologyLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Zhejiang Zhaolong Interconnect TechnologyLtd has decreased its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

In Conclusion...

While returns have fallen for Zhejiang Zhaolong Interconnect TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 200% to shareholders in the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Zhejiang Zhaolong Interconnect TechnologyLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Zhejiang Zhaolong Interconnect TechnologyLtd 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.