Investors Could Be Concerned With Zhejiang Cady Industry's (SHSE:603073) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Zhejiang Cady Industry (SHSE:603073) 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)?

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. To calculate this metric for Zhejiang Cady Industry, this is the formula:

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

0.074 = CN¥99m ÷ (CN¥1.6b - CN¥273m) (Based on the trailing twelve months to June 2024).

Thus, Zhejiang Cady Industry has an ROCE of 7.4%. On its own that's a low return, but compared to the average of 6.1% generated by the Luxury industry, it's much better.

See our latest analysis for Zhejiang Cady Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Cady Industry's ROCE against it's prior returns. If you'd like to look at how Zhejiang Cady Industry has performed in the past in other metrics, you can view this free graph of Zhejiang Cady Industry's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Zhejiang Cady Industry doesn't inspire confidence. To be more specific, ROCE has fallen from 25% 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'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 Cady Industry has done well to pay down its current liabilities to 17% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, Zhejiang Cady Industry is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 23% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Zhejiang Cady Industry has the makings of a multi-bagger.

Zhejiang Cady Industry does have some risks though, and we've spotted 1 warning sign for Zhejiang Cady Industry that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.