Changzhou Zhongying Science & Technology (SZSE:300936) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Changzhou Zhongying Science & Technology (SZSE:300936), it didn't seem to tick all of these boxes.

Understanding 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)

0.027 = CN¥29m ÷ (CN¥1.1b - CN¥37m) (Based on the trailing twelve months to March 2024).

Therefore, Changzhou Zhongying Science & Technology has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.2%.

Check out 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're interested in investigating Changzhou Zhongying Science & Technology's past further, check out this free graph covering Changzhou Zhongying Science & Technology's past earnings, revenue and cash flow.

What Does the ROCE Trend For Changzhou Zhongying Science & Technology Tell Us?

When we looked at the ROCE trend at Changzhou Zhongying Science & Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.7% from 20% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Key Takeaway

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. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 3 warning signs with Changzhou Zhongying Science & Technology (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

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.

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

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