Investors Could Be Concerned With Zhejiang Yingfeng Technology's (SHSE:605055) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Zhejiang Yingfeng Technology (SHSE:605055) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Zhejiang Yingfeng Technology:

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

0.044 = CN¥55m ÷ (CN¥2.3b - CN¥1.1b) (Based on the trailing twelve months to June 2024).

So, Zhejiang Yingfeng Technology has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 6.1%.

Check out our latest analysis for Zhejiang Yingfeng Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Yingfeng Technology's ROCE against it's prior returns. If you'd like to look at how Zhejiang Yingfeng Technology has performed in the past in other metrics, you can view this free graph of Zhejiang Yingfeng Technology's past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Yingfeng Technology's ROCE Trend?

When we looked at the ROCE trend at Zhejiang Yingfeng Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.4% from 20% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Zhejiang Yingfeng Technology has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Zhejiang Yingfeng Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Yingfeng Technology is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 33% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Zhejiang Yingfeng Technology does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) 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.