Zhen Ding Technology Holding (TWSE:4958) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at Zhen Ding Technology Holding (TWSE:4958), it didn't seem to tick all of these boxes.

What Is 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 Zhen Ding Technology Holding:

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

0.055 = NT$9.9b ÷ (NT$247b - NT$65b) (Based on the trailing twelve months to June 2024).

So, Zhen Ding Technology Holding has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 6.8%.

Check out our latest analysis for Zhen Ding Technology Holding

In the above chart we have measured Zhen Ding Technology Holding'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 Zhen Ding Technology Holding .

What Can We Tell From Zhen Ding Technology Holding's ROCE Trend?

When we looked at the ROCE trend at Zhen Ding Technology Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.5% from 16% five years ago. However it looks like Zhen Ding Technology Holding 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.

In Conclusion...

To conclude, we've found that Zhen Ding Technology Holding is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 1 warning sign for Zhen Ding Technology Holding that we think you should be aware of.

While Zhen Ding Technology Holding 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.