Returns On Capital Signal Tricky Times Ahead For Zhuzhou Hongda ElectronicsLtd (SZSE:300726)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think Zhuzhou Hongda ElectronicsLtd (SZSE:300726) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Zhuzhou Hongda ElectronicsLtd, this is the formula:

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

0.068 = CN¥367m ÷ (CN¥5.9b - CN¥452m) (Based on the trailing twelve months to September 2024).

So, Zhuzhou Hongda ElectronicsLtd has an ROCE of 6.8%. On its own that's a low return, but compared to the average of 5.5% generated by the Electronic industry, it's much better.

View our latest analysis for Zhuzhou Hongda ElectronicsLtd

In the above chart we have measured Zhuzhou Hongda ElectronicsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zhuzhou Hongda ElectronicsLtd for free.

So How Is Zhuzhou Hongda ElectronicsLtd's ROCE Trending?

On the surface, the trend of ROCE at Zhuzhou Hongda ElectronicsLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like Zhuzhou Hongda ElectronicsLtd 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.

What We Can Learn From Zhuzhou Hongda ElectronicsLtd's ROCE

To conclude, we've found that Zhuzhou Hongda ElectronicsLtd is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 31% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know more about Zhuzhou Hongda ElectronicsLtd, we've spotted 4 warning signs, and 1 of them doesn't sit too well with us.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.