Capital Allocation Trends At Ziel Home Furnishing Technology (SZSE:301376) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Ziel Home Furnishing Technology (SZSE:301376), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Ziel Home Furnishing Technology:

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

0.12 = CN¥486m ÷ (CN¥5.7b - CN¥1.8b) (Based on the trailing twelve months to March 2024).

Thus, Ziel Home Furnishing Technology has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Consumer Durables industry.

View our latest analysis for Ziel Home Furnishing Technology

In the above chart we have measured Ziel Home Furnishing Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ziel Home Furnishing Technology for free.

What Can We Tell From Ziel Home Furnishing Technology's ROCE Trend?

When we looked at the ROCE trend at Ziel Home Furnishing Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 30% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Ziel Home Furnishing Technology has done well to pay down its current liabilities to 31% 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. 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.

The Bottom Line On Ziel Home Furnishing Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ziel Home Furnishing Technology is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching Ziel Home Furnishing Technology, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Ziel Home Furnishing 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.

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