Zhejiang FORE Intelligent TechnologyLtd (SZSE:301368) 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? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Zhejiang FORE Intelligent TechnologyLtd (SZSE:301368), we don't think it's current trends fit the mold of a multi-bagger.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Zhejiang FORE Intelligent TechnologyLtd, this is the formula:

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

0.031 = CN¥30m ÷ (CN¥1.2b - CN¥223m) (Based on the trailing twelve months to September 2023).

Therefore, Zhejiang FORE Intelligent TechnologyLtd has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.0%.

Check out our latest analysis for Zhejiang FORE Intelligent TechnologyLtd

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

What Does the ROCE Trend For Zhejiang FORE Intelligent TechnologyLtd Tell Us?

In terms of Zhejiang FORE Intelligent TechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Zhejiang FORE Intelligent TechnologyLtd has done well to pay down its current liabilities to 19% 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

In summary, we're somewhat concerned by Zhejiang FORE Intelligent TechnologyLtd's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 105% over the last year, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Zhejiang FORE Intelligent TechnologyLtd, we've spotted 4 warning signs, and 3 of them are a bit concerning.

While Zhejiang FORE Intelligent 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.