The Returns On Capital At Zhuzhou Hongda ElectronicsLtd (SZSE:300726) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Zhuzhou Hongda ElectronicsLtd (SZSE:300726), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Zhuzhou Hongda ElectronicsLtd is:

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

0.079 = CN¥423m ÷ (CN¥5.8b - CN¥424m) (Based on the trailing twelve months to March 2024).

Thus, Zhuzhou Hongda ElectronicsLtd has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.2% generated by the Electronic industry, it's much better.

Check out 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. Over the last five years, returns on capital have decreased to 7.9% from 16% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Zhuzhou Hongda ElectronicsLtd have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 2 warning signs facing Zhuzhou Hongda ElectronicsLtd that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com