Zhejiang Meishuo Electric TechnologyLtd (SZSE:301295) 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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Zhejiang Meishuo Electric TechnologyLtd (SZSE:301295), it didn't seem to tick all of these boxes.

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 Meishuo Electric TechnologyLtd, this is the formula:

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

0.026 = CN¥25m ÷ (CN¥1.2b - CN¥233m) (Based on the trailing twelve months to March 2024).

Therefore, Zhejiang Meishuo Electric TechnologyLtd has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.0%.

See 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Meishuo Electric TechnologyLtd.

So How Is Zhejiang Meishuo Electric TechnologyLtd's ROCE Trending?

On the surface, the trend of ROCE at Zhejiang Meishuo Electric TechnologyLtd doesn't inspire confidence. Around five years ago the returns on capital were 36%, but since then they've fallen to 2.6%. However it looks like Zhejiang Meishuo Electric TechnologyLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Zhejiang Meishuo Electric TechnologyLtd has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. 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. 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.

What We Can Learn From Zhejiang Meishuo Electric TechnologyLtd's ROCE

To conclude, we've found that Zhejiang Meishuo Electric TechnologyLtd is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 15% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Zhejiang Meishuo Electric TechnologyLtd does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

While Zhejiang Meishuo Electric TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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