Capital Allocation Trends At Zhejiang Wandekai Fluid Equipment Technology (SZSE:301309) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Zhejiang Wandekai Fluid Equipment Technology (SZSE:301309) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. Analysts use this formula to calculate it for Zhejiang Wandekai Fluid Equipment Technology:

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

0.073 = CN¥109m ÷ (CN¥1.7b - CN¥209m) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang Wandekai Fluid Equipment Technology has an ROCE of 7.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.4%.

Check out our latest analysis for Zhejiang Wandekai Fluid Equipment Technology

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

What Can We Tell From Zhejiang Wandekai Fluid Equipment Technology's ROCE Trend?

On the surface, the trend of ROCE at Zhejiang Wandekai Fluid Equipment Technology doesn't inspire confidence. To be more specific, ROCE has fallen from 33% over the last five years. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Zhejiang Wandekai Fluid Equipment Technology 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.

The Key Takeaway

To conclude, we've found that Zhejiang Wandekai Fluid Equipment Technology is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Zhejiang Wandekai Fluid Equipment Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

While Zhejiang Wandekai Fluid Equipment 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.