Here's What's Concerning About Zhejiang Meida Industrial's (SZSE:002677) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Looking at Zhejiang Meida Industrial (SZSE:002677), it does have a high ROCE right now, but lets see how returns are trending.

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. The formula for this calculation on Zhejiang Meida Industrial is:

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

0.21 = CN¥450m ÷ (CN¥2.3b - CN¥206m) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang Meida Industrial has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 8.4%.

View our latest analysis for Zhejiang Meida Industrial

Above you can see how the current ROCE for Zhejiang Meida Industrial compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Meida Industrial .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Zhejiang Meida Industrial, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 30% where it was five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Zhejiang Meida Industrial has decreased its current liabilities to 8.8% 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.

What We Can Learn From Zhejiang Meida Industrial's ROCE

To conclude, we've found that Zhejiang Meida Industrial is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 26% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

One more thing to note, we've identified 1 warning sign with Zhejiang Meida Industrial and understanding it should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.

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