Ningbo Peacebird FashionLtd (SHSE:603877) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 Ningbo Peacebird FashionLtd (SHSE:603877), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for Ningbo Peacebird FashionLtd:

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

0.048 = CN¥275m ÷ (CN¥7.9b - CN¥2.1b) (Based on the trailing twelve months to September 2024).

Therefore, Ningbo Peacebird FashionLtd has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.5%.

Check out our latest analysis for Ningbo Peacebird FashionLtd

Above you can see how the current ROCE for Ningbo Peacebird FashionLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ningbo Peacebird FashionLtd .

So How Is Ningbo Peacebird FashionLtd's ROCE Trending?

When we looked at the ROCE trend at Ningbo Peacebird FashionLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.8% from 16% five years ago. However it looks like Ningbo Peacebird FashionLtd 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, Ningbo Peacebird FashionLtd has done well to pay down its current liabilities to 27% 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.

Our Take On Ningbo Peacebird FashionLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Ningbo Peacebird FashionLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 19% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Ningbo Peacebird FashionLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Ningbo Peacebird FashionLtd 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.