Returns On Capital Signal Tricky Times Ahead For Changzhou Zhongying Science & Technology (SZSE:300936)

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.

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. The formula for this calculation on Changzhou Zhongying Science & Technology is:

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

0.029 = CN¥30m ÷ (CN¥1.1b - CN¥38m) (Based on the trailing twelve months to June 2024).

So, Changzhou Zhongying Science & Technology has an ROCE of 2.9%. 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.

What Can We Tell From Changzhou Zhongying Science & Technology's ROCE Trend?

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 2.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 3.6% of total assets. That could partly explain why the ROCE has dropped. 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. Since the stock has gained an impressive 37% over the last three years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Changzhou Zhongying Science & Technology does have some risks, we noticed 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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.