Shenzhen Zesum Technology (SZSE:301486) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Shenzhen Zesum Technology (SZSE:301486) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Shenzhen Zesum Technology is:

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

0.036 = CN¥97m ÷ (CN¥3.0b - CN¥319m) (Based on the trailing twelve months to September 2024).

Thus, Shenzhen Zesum Technology has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.8%.

See our latest analysis for Shenzhen Zesum Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Zesum Technology's ROCE against it's prior returns. If you're interested in investigating Shenzhen Zesum Technology's past further, check out this free graph covering Shenzhen Zesum Technology's past earnings, revenue and cash flow.

What Can We Tell From Shenzhen Zesum Technology's ROCE Trend?

When we looked at the ROCE trend at Shenzhen Zesum Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Shenzhen Zesum Technology has done well to pay down 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.

The Bottom Line

While returns have fallen for Shenzhen Zesum Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 17% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Shenzhen Zesum Technology does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Shenzhen Zesum Technology 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.