Be Wary Of Zhejiang Biyi Electric Appliance (SHSE:603215) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Zhejiang Biyi Electric Appliance (SHSE:603215) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. The formula for this calculation on Zhejiang Biyi Electric Appliance is:

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

0.11 = CN¥121m ÷ (CN¥2.5b - CN¥1.4b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Biyi Electric Appliance has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.6% generated by the Consumer Durables industry.

View our latest analysis for Zhejiang Biyi Electric Appliance

Above you can see how the current ROCE for Zhejiang Biyi Electric Appliance compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Biyi Electric Appliance .

So How Is Zhejiang Biyi Electric Appliance's ROCE Trending?

On the surface, the trend of ROCE at Zhejiang Biyi Electric Appliance doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 51% five years ago. However it looks like Zhejiang Biyi Electric Appliance might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 Biyi Electric Appliance has done well to pay down its current liabilities to 54% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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. Keep in mind 54% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Zhejiang Biyi Electric Appliance's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 4.2% in the last year to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Zhejiang Biyi Electric Appliance does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.