Capital Allocation Trends At Zhongwang FabricLtd (SHSE:605003) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 investigating Zhongwang FabricLtd (SHSE:605003), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Zhongwang FabricLtd is:

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

0.042 = CN¥49m ÷ (CN¥1.5b - CN¥299m) (Based on the trailing twelve months to September 2023).

So, Zhongwang FabricLtd has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 5.9%.

View our latest analysis for Zhongwang FabricLtd

In the above chart we have measured Zhongwang FabricLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhongwang FabricLtd .

What Does the ROCE Trend For Zhongwang FabricLtd Tell Us?

On the surface, the trend of ROCE at Zhongwang FabricLtd doesn't inspire confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 4.2%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

In summary, we're somewhat concerned by Zhongwang FabricLtd's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 34% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Zhongwang FabricLtd does have some risks though, and we've spotted 3 warning signs for Zhongwang FabricLtd 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.