Returns On Capital Signal Tricky Times Ahead For Zenner Metering Technology (Shanghai) (SZSE:301303)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Zenner Metering Technology (Shanghai) (SZSE:301303), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Zenner Metering Technology (Shanghai):

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

0.076 = CN¥240m ÷ (CN¥3.8b - CN¥648m) (Based on the trailing twelve months to June 2024).

So, Zenner Metering Technology (Shanghai) has an ROCE of 7.6%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.4%.

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

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zenner Metering Technology (Shanghai)'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 Zenner Metering Technology (Shanghai).

The Trend Of ROCE

On the surface, the trend of ROCE at Zenner Metering Technology (Shanghai) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.6% 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.

On a related note, Zenner Metering Technology (Shanghai) has decreased its current liabilities to 17% 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Zenner Metering Technology (Shanghai)'s reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

Like most companies, Zenner Metering Technology (Shanghai) does come with some risks, and we've found 2 warning signs that you should be aware of.

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.