Some Investors May Be Worried About Ningbo Zhenyu Technology's (SZSE:300953) 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. 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. 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 Ningbo Zhenyu Technology (SZSE:300953), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ningbo Zhenyu Technology is:

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

0.022 = CN¥116m ÷ (CN¥11b - CN¥5.5b) (Based on the trailing twelve months to March 2024).

So, Ningbo Zhenyu Technology has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.6%.

See our latest analysis for Ningbo Zhenyu Technology

In the above chart we have measured Ningbo Zhenyu Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ningbo Zhenyu Technology for free.

How Are Returns Trending?

In terms of Ningbo Zhenyu Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Ningbo Zhenyu Technology has a high ratio of current liabilities to total assets of 51%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Ningbo Zhenyu Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ningbo Zhenyu Technology is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 44% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 2 warning signs facing Ningbo Zhenyu Technology that you might find interesting.

While Ningbo Zhenyu Technology 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.