Zhejiang Zhaolong Interconnect TechnologyLtd (SZSE:300913) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Zhejiang Zhaolong Interconnect TechnologyLtd (SZSE:300913) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Zhaolong Interconnect TechnologyLtd is:

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

0.069 = CN¥81m ÷ (CN¥1.4b - CN¥214m) (Based on the trailing twelve months to September 2024).

So, Zhejiang Zhaolong Interconnect TechnologyLtd has an ROCE of 6.9%. In absolute terms, that's a low return but it's around the Electrical industry average of 5.8%.

See our latest analysis for Zhejiang Zhaolong Interconnect TechnologyLtd

In the above chart we have measured Zhejiang Zhaolong Interconnect TechnologyLtd'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 Zhaolong Interconnect TechnologyLtd .

What Does the ROCE Trend For Zhejiang Zhaolong Interconnect TechnologyLtd Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 23% five years ago, while capital employed has grown 236%. Usually this isn't ideal, but given Zhejiang Zhaolong Interconnect TechnologyLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. 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. Additionally, we found that Zhejiang Zhaolong Interconnect TechnologyLtd's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

On a related note, Zhejiang Zhaolong Interconnect TechnologyLtd has decreased its current liabilities to 16% 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.

Our Take On Zhejiang Zhaolong Interconnect TechnologyLtd's ROCE

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 the stock has done incredibly well with a 385% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhejiang Zhaolong Interconnect TechnologyLtd (of which 1 can't be ignored!) that you should know about.

While Zhejiang Zhaolong Interconnect TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.