Zhejiang Jiecang Linear Motion TechnologyLtd (SHSE:603583) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Zhejiang Jiecang Linear Motion TechnologyLtd (SHSE:603583), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Zhejiang Jiecang Linear Motion TechnologyLtd:

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

0.046 = CN¥217m ÷ (CN¥6.6b - CN¥2.0b) (Based on the trailing twelve months to September 2023).

Therefore, Zhejiang Jiecang Linear Motion TechnologyLtd has an ROCE of 4.6%. Even though it's in line with the industry average of 5.3%, it's still a low return by itself.

See our latest analysis for Zhejiang Jiecang Linear Motion TechnologyLtd

Above you can see how the current ROCE for Zhejiang Jiecang Linear Motion TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Jiecang Linear Motion TechnologyLtd for free.

The Trend Of ROCE

We weren't thrilled with the trend because Zhejiang Jiecang Linear Motion TechnologyLtd's ROCE has reduced by 72% over the last five years, while the business employed 213% more capital. Usually this isn't ideal, but given Zhejiang Jiecang Linear Motion TechnologyLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 30%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Zhejiang Jiecang Linear Motion TechnologyLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Zhejiang Jiecang Linear Motion TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 25% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Zhejiang Jiecang Linear Motion TechnologyLtd does have some risks though, and we've spotted 2 warning signs for Zhejiang Jiecang Linear Motion TechnologyLtd that you might be interested in.

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.