Changzhou Xiangming Intelligent Drive System (SZSE:301226) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Changzhou Xiangming Intelligent Drive System (SZSE:301226) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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 Changzhou Xiangming Intelligent Drive System is:

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

0.0083 = CN¥7.5m ÷ (CN¥1.0b - CN¥125m) (Based on the trailing twelve months to September 2024).

Therefore, Changzhou Xiangming Intelligent Drive System has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.8%.

Check out our latest analysis for Changzhou Xiangming Intelligent Drive System

Historical performance is a great place to start when researching a stock so above you can see the gauge for Changzhou Xiangming Intelligent Drive System's ROCE against it's prior returns. If you're interested in investigating Changzhou Xiangming Intelligent Drive System's past further, check out this free graph covering Changzhou Xiangming Intelligent Drive System's past earnings, revenue and cash flow.

What Can We Tell From Changzhou Xiangming Intelligent Drive System's ROCE Trend?

In terms of Changzhou Xiangming Intelligent Drive System's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Changzhou Xiangming Intelligent Drive System has done well to pay down its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. 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 Changzhou Xiangming Intelligent Drive System's ROCE

We're a bit apprehensive about Changzhou Xiangming Intelligent Drive System because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And, the stock has remained flat over the last year, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Changzhou Xiangming Intelligent Drive System we've found 4 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.