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

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Zhangjiagang Haiguo New Energy Equipment Manufacturing (SZSE:301063) 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)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.033 = CN¥50m ÷ (CN¥2.3b - CN¥711m) (Based on the trailing twelve months to March 2024).

Therefore, Zhangjiagang Haiguo New Energy Equipment Manufacturing has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.7%.

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.

So How Is Zhangjiagang Haiguo New Energy Equipment Manufacturing's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 21% five years ago, while the business's capital employed increased by 422%. Usually this isn't ideal, but given Zhangjiagang Haiguo New Energy Equipment Manufacturing conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Zhangjiagang Haiguo New Energy Equipment Manufacturing probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Zhangjiagang Haiguo New Energy Equipment Manufacturing has decreased its current liabilities to 32% 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 Key Takeaway

In summary, we're somewhat concerned by Zhangjiagang Haiguo New Energy Equipment Manufacturing's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 46% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Zhangjiagang Haiguo New Energy Equipment Manufacturing we've found 4 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.