There Are Reasons To Feel Uneasy About Hangzhou Jizhi Mechatronic's (SZSE:300553) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Hangzhou Jizhi Mechatronic (SZSE:300553) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Hangzhou Jizhi Mechatronic:

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

0.007 = CN¥5.9m ÷ (CN¥990m - CN¥148m) (Based on the trailing twelve months to September 2023).

Thus, Hangzhou Jizhi Mechatronic has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.4%.

Check out our latest analysis for Hangzhou Jizhi Mechatronic

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Jizhi Mechatronic'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 Hangzhou Jizhi Mechatronic.

How Are Returns Trending?

When we looked at the ROCE trend at Hangzhou Jizhi Mechatronic, we didn't gain much confidence. Around five years ago the returns on capital were 5.4%, but since then they've fallen to 0.7%. 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. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Hangzhou Jizhi Mechatronic is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 17% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Hangzhou Jizhi Mechatronic (of which 1 is significant!) that you should know about.

While Hangzhou Jizhi Mechatronic 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.