Some Investors May Be Worried About Zhuzhou CRRC Times Electric's (HKG:3898) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Zhuzhou CRRC Times Electric (HKG:3898), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. 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)

0.062 = CN¥2.8b ÷ (CN¥62b - CN¥17b) (Based on the trailing twelve months to June 2024).

Therefore, Zhuzhou CRRC Times Electric has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.1%.

View 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're interested, you can view the analysts predictions in our free analyst report for Zhuzhou CRRC Times Electric .

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

When we looked at the ROCE trend at Zhuzhou CRRC Times Electric, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% 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.

Our Take On Zhuzhou CRRC Times Electric's ROCE

While returns have fallen for Zhuzhou CRRC Times Electric in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 1 warning sign facing Zhuzhou CRRC Times Electric that you might find interesting.

While Zhuzhou CRRC Times Electric may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.