Zhejiang Cady Industry (SHSE:603073) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Zhejiang Cady Industry (SHSE:603073), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.066 = CN¥85m ÷ (CN¥1.6b - CN¥268m) (Based on the trailing twelve months to September 2023).

Therefore, Zhejiang Cady Industry has an ROCE of 6.6%. On its own, that's a low figure but it's around the 5.7% average generated by the Luxury industry.

View 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Cady Industry.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Zhejiang Cady Industry, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 6.6% from 23% four years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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. That could partly explain why the ROCE has dropped. 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.

The Bottom Line On Zhejiang Cady Industry's ROCE

To conclude, we've found that Zhejiang Cady Industry is reinvesting in the business, but returns have been falling. Since the stock has declined 20% over the last year, investors may not be too optimistic on this trend improving either. 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.

If you want to continue researching Zhejiang Cady Industry, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Zhejiang Cady Industry 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.