Returns On Capital Signal Tricky Times Ahead For Zhejiang Mustang BatteryLtd (SHSE:605378)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Zhejiang Mustang BatteryLtd (SHSE:605378) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Zhejiang Mustang BatteryLtd, this is the formula:

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

0.11 = CN¥141m ÷ (CN¥1.7b - CN¥382m) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang Mustang BatteryLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 3.8% generated by the Household Products industry.

See our latest analysis for Zhejiang Mustang BatteryLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Mustang BatteryLtd.

So How Is Zhejiang Mustang BatteryLtd's ROCE Trending?

On the surface, the trend of ROCE at Zhejiang Mustang BatteryLtd doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 11%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Zhejiang Mustang BatteryLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Mustang BatteryLtd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 72% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know more about Zhejiang Mustang BatteryLtd, we've spotted 3 warning signs, and 2 of them are a bit concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.