Returns On Capital At Jiangsu Zeyu Intelligent PowerLtd (SZSE:301179) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Jiangsu Zeyu Intelligent PowerLtd (SZSE:301179), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Jiangsu Zeyu Intelligent PowerLtd is:

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

0.084 = CN¥196m ÷ (CN¥3.5b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

Therefore, Jiangsu Zeyu Intelligent PowerLtd has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 4.0% generated by the IT industry, it's much better.

See our latest analysis for Jiangsu Zeyu Intelligent PowerLtd

In the above chart we have measured Jiangsu Zeyu Intelligent PowerLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Zeyu Intelligent PowerLtd for free.

What Can We Tell From Jiangsu Zeyu Intelligent PowerLtd's ROCE Trend?

In terms of Jiangsu Zeyu Intelligent PowerLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 31% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Jiangsu Zeyu Intelligent PowerLtd has decreased its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. 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.

What We Can Learn From Jiangsu Zeyu Intelligent PowerLtd's ROCE

In summary, Jiangsu Zeyu Intelligent PowerLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 25% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Jiangsu Zeyu Intelligent PowerLtd (of which 1 shouldn't be ignored!) that you should know about.

While Jiangsu Zeyu Intelligent PowerLtd 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.