Returns On Capital At Zenner Metering Technology (Shanghai) (SZSE:301303) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Zenner Metering Technology (Shanghai) (SZSE:301303) 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)

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. To calculate this metric for Zenner Metering Technology (Shanghai), this is the formula:

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

0.085 = CN¥256m ÷ (CN¥3.5b - CN¥536m) (Based on the trailing twelve months to September 2023).

Therefore, Zenner Metering Technology (Shanghai) has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.5%.

Check out our latest analysis for Zenner Metering Technology (Shanghai)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zenner Metering Technology (Shanghai).

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Zenner Metering Technology (Shanghai), we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Zenner Metering Technology (Shanghai) has done well to pay down its current liabilities to 15% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Zenner Metering Technology (Shanghai)'s ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zenner Metering Technology (Shanghai). These growth trends haven't led to growth returns though, since the stock has fallen 33% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Zenner Metering Technology (Shanghai) does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

While Zenner Metering Technology (Shanghai) 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.