The Returns On Capital At Ningbo Water Meter (Group)Ltd (SHSE:603700) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Ningbo Water Meter (Group)Ltd (SHSE:603700) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Ningbo Water Meter (Group)Ltd, this is the formula:

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

0.077 = CN¥121m ÷ (CN¥2.3b - CN¥674m) (Based on the trailing twelve months to June 2024).

Thus, Ningbo Water Meter (Group)Ltd has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 5.4% generated by the Electronic industry, it's much better.

View our latest analysis for Ningbo Water Meter (Group)Ltd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ningbo Water Meter (Group)Ltd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ningbo Water Meter (Group)Ltd.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Ningbo Water Meter (Group)Ltd, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like Ningbo Water Meter (Group)Ltd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Ningbo Water Meter (Group)Ltd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Ningbo Water Meter (Group)Ltd has the makings of a multi-bagger.

If you'd like to know more about Ningbo Water Meter (Group)Ltd, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While Ningbo Water Meter (Group)Ltd 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.