The Returns On Capital At SMARTGEN (Zhengzhou) Technology (SZSE:301361) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think SMARTGEN (Zhengzhou) Technology (SZSE:301361) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 SMARTGEN (Zhengzhou) Technology, this is the formula:

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

0.052 = CN¥59m ÷ (CN¥1.2b - CN¥44m) (Based on the trailing twelve months to September 2024).

So, SMARTGEN (Zhengzhou) Technology has an ROCE of 5.2%. On its own, that's a low figure but it's around the 5.5% average generated by the Electronic industry.

Check out 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of SMARTGEN (Zhengzhou) Technology.

The Trend Of ROCE

On the surface, the trend of ROCE at SMARTGEN (Zhengzhou) Technology doesn't inspire confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 5.2%. 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 side note, SMARTGEN (Zhengzhou) Technology has done well to pay down its current liabilities to 3.7% 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 On SMARTGEN (Zhengzhou) Technology's ROCE

In summary, SMARTGEN (Zhengzhou) 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 21% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

SMARTGEN (Zhengzhou) Technology could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 301361 on our platform quite valuable.

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.