The Returns On Capital At Jiangsu Zeyu Intelligent PowerLtd (SZSE:301179) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Jiangsu Zeyu Intelligent PowerLtd (SZSE:301179) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Jiangsu Zeyu Intelligent PowerLtd:

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

0.09 = CN¥208m ÷ (CN¥3.1b - CN¥796m) (Based on the trailing twelve months to June 2024).

Therefore, Jiangsu Zeyu Intelligent PowerLtd has an ROCE of 9.0%. In absolute terms, that's a low return, but it's much better than the IT industry average of 3.8%.

See our latest analysis for Jiangsu Zeyu Intelligent PowerLtd

Above you can see how the current ROCE for Jiangsu Zeyu Intelligent PowerLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Zeyu Intelligent PowerLtd .

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

When we looked at the ROCE trend at Jiangsu Zeyu Intelligent PowerLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.0% from 32% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Jiangsu Zeyu Intelligent PowerLtd has decreased its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jiangsu Zeyu Intelligent PowerLtd. And the stock has followed suit returning a meaningful 11% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing: We've identified 2 warning signs with Jiangsu Zeyu Intelligent PowerLtd (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

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.