Zhuzhou CRRC Times Electric (HKG:3898) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Zhuzhou CRRC Times Electric is:

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

0.067 = CN¥2.7b ÷ (CN¥55b - CN¥14b) (Based on the trailing twelve months to March 2024).

Therefore, Zhuzhou CRRC Times Electric has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.5%.

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 to see what analysts are forecasting going forward, you should check out our free analyst report for Zhuzhou CRRC Times Electric .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Zhuzhou CRRC Times Electric doesn't inspire confidence. To be more specific, ROCE has fallen from 14% 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.

What We Can Learn From Zhuzhou CRRC Times Electric's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhuzhou CRRC Times Electric is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 20% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

While Zhuzhou CRRC Times Electric doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 3898 on our platform.

While Zhuzhou CRRC Times Electric 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.

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