Chengdu Zhimingda Electronics (SHSE:688636) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Chengdu Zhimingda Electronics (SHSE:688636), it didn't seem to tick all of these boxes.

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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. The formula for this calculation on Chengdu Zhimingda Electronics is:

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

0.014 = CN¥15m ÷ (CN¥1.5b - CN¥377m) (Based on the trailing twelve months to December 2024).

So, Chengdu Zhimingda Electronics has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Tech industry average of 5.5%.

See our latest analysis for Chengdu Zhimingda Electronics

Above you can see how the current ROCE for Chengdu Zhimingda Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Chengdu Zhimingda Electronics .

What Does the ROCE Trend For Chengdu Zhimingda Electronics Tell Us?

When we looked at the ROCE trend at Chengdu Zhimingda Electronics, we didn't gain much confidence. Around four years ago the returns on capital were 28%, but since then they've fallen to 1.4%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

In summary, we're somewhat concerned by Chengdu Zhimingda Electronics' diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last three years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Chengdu Zhimingda Electronics does come with some risks, and we've found 1 warning sign that you should be aware of.

While Chengdu Zhimingda Electronics 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.