Zhejiang Prulde Electric Appliance (SZSE:301353) Is Reinvesting At Lower Rates Of Return

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Zhejiang Prulde Electric Appliance (SZSE:301353) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Zhejiang Prulde Electric Appliance is:

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

0.041 = CN¥55m ÷ (CN¥1.5b - CN¥139m) (Based on the trailing twelve months to March 2024).

Therefore, Zhejiang Prulde Electric Appliance has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.4%.

View our latest analysis for Zhejiang Prulde Electric Appliance

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

So How Is Zhejiang Prulde Electric Appliance's ROCE Trending?

On the surface, the trend of ROCE at Zhejiang Prulde Electric Appliance doesn't inspire confidence. To be more specific, ROCE has fallen from 21% over the last five years. However it looks like Zhejiang Prulde Electric Appliance might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 related note, Zhejiang Prulde Electric Appliance has decreased its current liabilities to 9.4% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Zhejiang Prulde Electric Appliance is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 20% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhejiang Prulde Electric Appliance (of which 1 is significant!) that you should know about.

While Zhejiang Prulde Electric Appliance 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com