Here's What's Concerning About Zhejiang Jiecang Linear Motion TechnologyLtd's (SHSE:603583) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Zhejiang Jiecang Linear Motion TechnologyLtd (SHSE:603583), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 Zhejiang Jiecang Linear Motion TechnologyLtd, this is the formula:

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

0.072 = CN¥326m ÷ (CN¥6.3b - CN¥1.8b) (Based on the trailing twelve months to March 2024).

So, Zhejiang Jiecang Linear Motion TechnologyLtd has an ROCE of 7.2%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.2%.

View our latest analysis for Zhejiang Jiecang Linear Motion TechnologyLtd

In the above chart we have measured Zhejiang Jiecang Linear Motion TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Jiecang Linear Motion TechnologyLtd .

So How Is Zhejiang Jiecang Linear Motion TechnologyLtd's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 18% five years ago, while capital employed has grown 167%. That being said, Zhejiang Jiecang Linear Motion TechnologyLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Zhejiang Jiecang Linear Motion TechnologyLtd 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 side note, Zhejiang Jiecang Linear Motion TechnologyLtd's current liabilities have increased over the last five years to 29% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Zhejiang Jiecang Linear Motion TechnologyLtd's ROCE

While returns have fallen for Zhejiang Jiecang Linear Motion TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 3.6% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing to note, we've identified 1 warning sign with Zhejiang Jiecang Linear Motion TechnologyLtd and understanding it should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com