Ningbo Dechang Electrical Machinery Made (SHSE:605555) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Ningbo Dechang Electrical Machinery Made (SHSE:605555), it didn't seem to tick all of these boxes.

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. To calculate this metric for Ningbo Dechang Electrical Machinery Made, this is the formula:

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

0.094 = CN¥301m ÷ (CN¥4.6b - CN¥1.4b) (Based on the trailing twelve months to March 2024).

Thus, Ningbo Dechang Electrical Machinery Made has an ROCE of 9.4%. On its own, that's a low figure but it's around the 8.4% average generated by the Consumer Durables industry.

See our latest analysis for Ningbo Dechang Electrical Machinery Made

Above you can see how the current ROCE for Ningbo Dechang Electrical Machinery Made 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 Dechang Electrical Machinery Made .

So How Is Ningbo Dechang Electrical Machinery Made's ROCE Trending?

In terms of Ningbo Dechang Electrical Machinery Made's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 44%, but since then they've fallen to 9.4%. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Ningbo Dechang Electrical Machinery Made has decreased its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. 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.

The Key Takeaway

While returns have fallen for Ningbo Dechang Electrical Machinery Made in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 45% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 1 warning sign for Ningbo Dechang Electrical Machinery Made you'll probably want to know about.

While Ningbo Dechang Electrical Machinery Made 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.