Returns On Capital Signal Tricky Times Ahead For Zhejiang Chunhui Intelligent Control (SZSE:300943)

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Zhejiang Chunhui Intelligent Control (SZSE:300943) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Zhejiang Chunhui Intelligent Control, this is the formula:

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

0.03 = CN¥29m ÷ (CN¥1.2b - CN¥256m) (Based on the trailing twelve months to June 2024).

Therefore, Zhejiang Chunhui Intelligent Control has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

View our latest analysis for Zhejiang Chunhui Intelligent Control

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Chunhui Intelligent Control's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Chunhui Intelligent Control.

How Are Returns Trending?

On the surface, the trend of ROCE at Zhejiang Chunhui Intelligent Control doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.0% from 18% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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, Zhejiang Chunhui Intelligent Control has decreased its current liabilities to 21% 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.

The Bottom Line

To conclude, we've found that Zhejiang Chunhui Intelligent Control is reinvesting in the business, but returns have been falling. Since the stock has declined 10% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Zhejiang Chunhui Intelligent Control, we've spotted 4 warning signs, and 2 of them don't sit too well with us.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.