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

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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)

0.085 = CN¥385m ÷ (CN¥6.6b - CN¥2.0b) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang Jiecang Linear Motion TechnologyLtd has an ROCE of 8.5%. On its own that's a low return, but compared to the average of 5.5% generated by the Electronic industry, it's much better.

See 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 .

What Does the ROCE Trend For Zhejiang Jiecang Linear Motion TechnologyLtd Tell Us?

In terms of Zhejiang Jiecang Linear Motion TechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 31%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 8.5%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

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. These trends are starting to be recognized by investors since the stock has delivered a 15% gain to shareholders who've held 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.

Like most companies, Zhejiang Jiecang Linear Motion TechnologyLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Zhejiang Jiecang Linear Motion TechnologyLtd 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.