The Returns On Capital At Zhejiang TongLi Transmission Technology (SZSE:301255) Don't Inspire Confidence

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. In light of that, when we looked at Zhejiang TongLi Transmission Technology (SZSE:301255) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 TongLi Transmission Technology, this is the formula:

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

0.059 = CN¥64m ÷ (CN¥1.3b - CN¥233m) (Based on the trailing twelve months to June 2024).

Thus, Zhejiang TongLi Transmission Technology has an ROCE of 5.9%. Even though it's in line with the industry average of 5.7%, it's still a low return by itself.

View our latest analysis for Zhejiang TongLi Transmission Technology

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang TongLi Transmission Technology.

What Can We Tell From Zhejiang TongLi Transmission Technology's ROCE Trend?

When we looked at the ROCE trend at Zhejiang TongLi Transmission Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. 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 TongLi Transmission Technology has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 TongLi Transmission Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Zhejiang TongLi Transmission Technology's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 56% in the last year. Therefore based on the analysis done in this article, we don't think Zhejiang TongLi Transmission Technology has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Zhejiang TongLi Transmission Technology (including 1 which is a bit unpleasant) .

While Zhejiang TongLi Transmission 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.