Investors Could Be Concerned With Zhuzhou CRRC Times Electric's (HKG:3898) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Zhuzhou CRRC Times Electric (HKG:3898) 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)

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 Zhuzhou CRRC Times Electric:

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

0.045 = CN¥1.6b ÷ (CN¥45b - CN¥9.7b) (Based on the trailing twelve months to March 2022).

Thus, Zhuzhou CRRC Times Electric has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.2%.

See our latest analysis for Zhuzhou CRRC Times Electric

Above you can see how the current ROCE for Zhuzhou CRRC Times Electric compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Zhuzhou CRRC Times Electric Tell Us?

On the surface, the trend of ROCE at Zhuzhou CRRC Times Electric doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 4.5%. However it looks like Zhuzhou CRRC Times Electric might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Our Take On Zhuzhou CRRC Times Electric's ROCE

Bringing it all together, while we're somewhat encouraged by Zhuzhou CRRC Times Electric's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 2.4% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we've found 2 warning signs for Zhuzhou CRRC Times Electric that we think you should be aware of.

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.