Zhejiang Jiecang Linear Motion TechnologyLtd's (SHSE:603583) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Zhejiang Jiecang Linear Motion TechnologyLtd (SHSE:603583) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Zhejiang Jiecang Linear Motion TechnologyLtd:

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).

So, 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 5.8% generated by the Electronic industry, it's much better.

View 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.

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

When we looked at the ROCE trend at Zhejiang Jiecang Linear Motion TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.5% from 18% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. 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. 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.

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. And the stock has done incredibly well with a 106% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

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 may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.