Capital Allocation Trends At Zhejiang Meishuo Electric TechnologyLtd (SZSE:301295) Aren't Ideal

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. 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. 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 Meishuo Electric TechnologyLtd (SZSE:301295) and its ROCE trend, we weren't exactly thrilled.

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

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 Zhejiang Meishuo Electric TechnologyLtd is:

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

0.017 = CN¥16m ÷ (CN¥1.2b - CN¥195m) (Based on the trailing twelve months to September 2024).

So, Zhejiang Meishuo Electric TechnologyLtd has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.8%.

View our latest analysis for Zhejiang Meishuo Electric TechnologyLtd

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're interested in investigating Zhejiang Meishuo Electric TechnologyLtd's past further, check out this free graph covering Zhejiang Meishuo Electric TechnologyLtd's past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Meishuo Electric TechnologyLtd's ROCE Trend?

In terms of Zhejiang Meishuo Electric TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 38%, but since then they've fallen to 1.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 side note, Zhejiang Meishuo Electric TechnologyLtd has done well to pay down its current liabilities to 17% 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.

The Bottom Line On Zhejiang Meishuo Electric TechnologyLtd's ROCE

In summary, Zhejiang Meishuo Electric TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 17% in the last year. Therefore based on the analysis done in this article, we don't think Zhejiang Meishuo Electric TechnologyLtd has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Zhejiang Meishuo Electric TechnologyLtd (of which 3 make us uncomfortable!) that you should know about.

While Zhejiang Meishuo Electric TechnologyLtd 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.