Some Investors May Be Worried About Zhejiang Bofay Electric's (SZSE:001255) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Zhejiang Bofay Electric (SZSE:001255), it didn't seem to tick all of these boxes.

What Is 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 Zhejiang Bofay Electric:

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

0.0018 = CN¥1.4m ÷ (CN¥990m - CN¥196m) (Based on the trailing twelve months to June 2024).

So, Zhejiang Bofay Electric has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

See our latest analysis for Zhejiang Bofay Electric

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

So How Is Zhejiang Bofay Electric's ROCE Trending?

In terms of Zhejiang Bofay Electric's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 26%, but since then they've fallen to 0.2%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Zhejiang Bofay Electric has done well to pay down its current liabilities to 20% 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. 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 Bottom Line

In summary, we're somewhat concerned by Zhejiang Bofay Electric's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 39% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Zhejiang Bofay Electric (1 is a bit unpleasant) you should be aware of.

While Zhejiang Bofay Electric may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.