Zhejiang FORE Intelligent TechnologyLtd's (SZSE:301368) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. In light of that, when we looked at Zhejiang FORE Intelligent TechnologyLtd (SZSE:301368) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.0051 = CN¥5.0m ÷ (CN¥1.2b - CN¥226m) (Based on the trailing twelve months to March 2024).

So, Zhejiang FORE Intelligent TechnologyLtd has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.7%.

See 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 Can We Tell From Zhejiang FORE Intelligent TechnologyLtd's ROCE Trend?

When we looked at the ROCE trend at Zhejiang FORE Intelligent TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.5% from 16% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Zhejiang FORE Intelligent TechnologyLtd has decreased 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.

What We Can Learn From Zhejiang FORE Intelligent TechnologyLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang FORE Intelligent TechnologyLtd is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 26% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 4 warning signs for Zhejiang FORE Intelligent TechnologyLtd (2 shouldn't be ignored) you should be aware of.

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.