Zhejiang Biyi Electric Appliance (SHSE:603215) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 Biyi Electric Appliance (SHSE:603215), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Biyi Electric Appliance, this is the formula:

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

0.12 = CN¥137m ÷ (CN¥1.6b - CN¥505m) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang Biyi Electric Appliance has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Consumer Durables industry.

See 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 .

What The Trend Of ROCE Can Tell Us

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 12% from 41% five years ago. 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 related note, Zhejiang Biyi Electric Appliance has decreased its current liabilities to 31% 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...

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 investors appear hesitant that the trends will pick up because the stock has fallen 32% in the last year. Therefore based on the analysis done in this article, we don't think Zhejiang Biyi Electric Appliance has the makings of a multi-bagger.

One final note, you should learn about the 2 warning signs we've spotted with Zhejiang Biyi Electric Appliance (including 1 which can't be ignored) .

While Zhejiang Biyi Electric Appliance 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com