Zhangjiagang Haiguo New Energy Equipment Manufacturing (SZSE:301063) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Zhangjiagang Haiguo New Energy Equipment Manufacturing (SZSE:301063), 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 Zhangjiagang Haiguo New Energy Equipment Manufacturing:

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

0.058 = CN¥90m ÷ (CN¥2.2b - CN¥688m) (Based on the trailing twelve months to September 2023).

Thus, Zhangjiagang Haiguo New Energy Equipment Manufacturing has an ROCE of 5.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.

See our latest analysis for Zhangjiagang Haiguo New Energy Equipment Manufacturing

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're interested in investigating Zhangjiagang Haiguo New Energy Equipment Manufacturing's past further, check out this free graph covering Zhangjiagang Haiguo New Energy Equipment Manufacturing's past earnings, revenue and cash flow.

What Can We Tell From Zhangjiagang Haiguo New Energy Equipment Manufacturing's ROCE Trend?

We weren't thrilled with the trend because Zhangjiagang Haiguo New Energy Equipment Manufacturing's ROCE has reduced by 72% over the last five years, while the business employed 569% more capital. That being said, Zhangjiagang Haiguo New Energy Equipment Manufacturing raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Zhangjiagang Haiguo New Energy Equipment Manufacturing's earnings and if they change as a result from the capital raise.

On a related note, Zhangjiagang Haiguo New Energy Equipment Manufacturing has decreased its current liabilities to 31% 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.

The Bottom Line On Zhangjiagang Haiguo New Energy Equipment Manufacturing's ROCE

Bringing it all together, while we're somewhat encouraged by Zhangjiagang Haiguo New Energy Equipment Manufacturing's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 54% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Like most companies, Zhangjiagang Haiguo New Energy Equipment Manufacturing does come with some risks, and we've found 3 warning signs that you should be aware of.

While Zhangjiagang Haiguo New Energy Equipment Manufacturing 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.