Returns On Capital At Zhuzhou CRRC Times Electric (HKG:3898) Paint A Concerning Picture

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. 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. In light of that, when we looked at Zhuzhou CRRC Times Electric (HKG:3898) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.044 = CN¥1.6b ÷ (CN¥44b - CN¥9.2b) (Based on the trailing twelve months to December 2021).

Thus, Zhuzhou CRRC Times Electric has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 7.5%.

See our latest analysis for Zhuzhou CRRC Times Electric

In the above chart we have measured Zhuzhou CRRC Times Electric's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zhuzhou CRRC Times Electric here for free.

So How Is Zhuzhou CRRC Times Electric's ROCE Trending?

On the surface, the trend of ROCE at Zhuzhou CRRC Times Electric doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Zhuzhou CRRC Times Electric 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 declined 31% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Zhuzhou CRRC Times Electric does have some risks though, and we've spotted 4 warning signs for Zhuzhou CRRC Times Electric that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.