Be Wary Of Zhuhai Raysharp TechnologyLtd (SZSE:301042) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Zhuhai Raysharp TechnologyLtd (SZSE:301042) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Zhuhai Raysharp TechnologyLtd:

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

0.069 = CN¥75m ÷ (CN¥1.2b - CN¥136m) (Based on the trailing twelve months to June 2024).

So, Zhuhai Raysharp TechnologyLtd has an ROCE of 6.9%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.4%.

See our latest analysis for Zhuhai Raysharp TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhuhai Raysharp TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhuhai Raysharp TechnologyLtd.

How Are Returns Trending?

On the surface, the trend of ROCE at Zhuhai Raysharp TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. However it looks like Zhuhai Raysharp TechnologyLtd 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.

On a related note, Zhuhai Raysharp TechnologyLtd has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Zhuhai Raysharp TechnologyLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Zhuhai Raysharp TechnologyLtd does have some risks though, and we've spotted 1 warning sign for Zhuhai Raysharp TechnologyLtd that you might be interested in.

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.