Be Wary Of Changzhou Zhongying Science & Technology (SZSE:300936) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at Changzhou Zhongying Science & Technology (SZSE:300936) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Changzhou Zhongying Science & Technology, this is the formula:

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

0.022 = CN¥23m ÷ (CN¥1.1b - CN¥47m) (Based on the trailing twelve months to September 2024).

Thus, Changzhou Zhongying Science & Technology has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.5%.

See our latest analysis for Changzhou Zhongying Science & Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Changzhou Zhongying Science & Technology's ROCE against it's prior returns. If you'd like to look at how Changzhou Zhongying Science & Technology has performed in the past in other metrics, you can view this free graph of Changzhou Zhongying Science & Technology's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Changzhou Zhongying Science & Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 19%, but since then they've fallen to 2.2%. However it looks like Changzhou Zhongying Science & Technology 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Changzhou Zhongying Science & Technology has decreased its current liabilities to 4.3% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, Changzhou Zhongying Science & Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 22% to shareholders over the last three years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 2 warning signs we've spotted with Changzhou Zhongying Science & Technology (including 1 which is potentially serious) .

While Changzhou Zhongying Science & Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.