Capital Allocation Trends At SMARTGEN (Zhengzhou) Technology (SZSE:301361) Aren't Ideal

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at SMARTGEN (Zhengzhou) Technology (SZSE:301361), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for SMARTGEN (Zhengzhou) Technology:

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

0.051 = CN¥56m ÷ (CN¥1.1b - CN¥30m) (Based on the trailing twelve months to March 2024).

So, SMARTGEN (Zhengzhou) Technology has an ROCE of 5.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.2%.

See our latest analysis for SMARTGEN (Zhengzhou) Technology

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're interested in investigating SMARTGEN (Zhengzhou) Technology's past further, check out this free graph covering SMARTGEN (Zhengzhou) Technology's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of SMARTGEN (Zhengzhou) Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 23% over the last five years. 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.

What We Can Learn From SMARTGEN (Zhengzhou) Technology's ROCE

To conclude, we've found that SMARTGEN (Zhengzhou) Technology is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think SMARTGEN (Zhengzhou) Technology has the makings of a multi-bagger.

SMARTGEN (Zhengzhou) Technology does have some risks though, and we've spotted 1 warning sign for SMARTGEN (Zhengzhou) Technology that you might be interested in.

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.