Returns On Capital Signal Tricky Times Ahead For Zhejiang Yingfeng Technology (SHSE:605055)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Zhejiang Yingfeng Technology (SHSE:605055), it didn't seem to tick all of these boxes.

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. 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)

0.036 = CN¥45m ÷ (CN¥2.5b - CN¥1.2b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Yingfeng Technology has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.6%.

View 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?

In terms of Zhejiang Yingfeng Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 Yingfeng Technology's current liabilities have increased over the last five years to 49% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Zhejiang Yingfeng Technology's ROCE

To conclude, we've found that Zhejiang Yingfeng Technology is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 27% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 3 warning signs for Zhejiang Yingfeng Technology (2 don't sit too well with us) you should be aware of.

While Zhejiang Yingfeng Technology 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.