Changzhou Xiangming Intelligent Drive System's (SZSE:301226) Returns On Capital Not Reflecting Well On The Business

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Changzhou Xiangming Intelligent Drive System (SZSE:301226), it didn't seem to tick all of these boxes.

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 Changzhou Xiangming Intelligent Drive System is:

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

0.013 = CN¥12m ÷ (CN¥1.0b - CN¥131m) (Based on the trailing twelve months to June 2024).

Therefore, Changzhou Xiangming Intelligent Drive System has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 5.9%.

See our latest analysis for Changzhou Xiangming Intelligent Drive System

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Changzhou Xiangming Intelligent Drive System has performed in the past in other metrics, you can view this free graph of Changzhou Xiangming Intelligent Drive System's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Changzhou Xiangming Intelligent Drive System doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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 related note, Changzhou Xiangming Intelligent Drive System has decreased its current liabilities to 13% 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. 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...

From the above analysis, we find it rather worrisome that returns on capital and sales for Changzhou Xiangming Intelligent Drive System have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last year. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Changzhou Xiangming Intelligent Drive System we've found 5 warning signs (3 are concerning!) that you should be aware of before investing here.

While Changzhou Xiangming Intelligent Drive System isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.