Be Wary Of Beijing ZZNode Technologies (SZSE:003007) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Beijing ZZNode Technologies (SZSE:003007), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Beijing ZZNode Technologies, this is the formula:

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

0.038 = CN¥29m ÷ (CN¥904m - CN¥130m) (Based on the trailing twelve months to September 2023).

So, Beijing ZZNode Technologies has an ROCE of 3.8%. On its own that's a low return, but compared to the average of 2.6% generated by the Software industry, it's much better.

See our latest analysis for Beijing ZZNode Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing ZZNode Technologies' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Beijing ZZNode Technologies.

So How Is Beijing ZZNode Technologies' ROCE Trending?

When we looked at the ROCE trend at Beijing ZZNode Technologies, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 3.8%. 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.

The Bottom Line

While returns have fallen for Beijing ZZNode Technologies in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 23% over the last three years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Beijing ZZNode Technologies we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While Beijing ZZNode Technologies 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.