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Zhongjie (Jiangsu) TechnologyLtd's (SZSE:301072) Returns On Capital Not Reflecting Well On The Business

Simply Wall St ·  09/29 10:25

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Zhongjie (Jiangsu) TechnologyLtd (SZSE:301072) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Zhongjie (Jiangsu) TechnologyLtd is:

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

0.026 = CN¥20m ÷ (CN¥983m - CN¥198m) (Based on the trailing twelve months to June 2022).

So, Zhongjie (Jiangsu) TechnologyLtd has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 4.9%.

See our latest analysis for Zhongjie (Jiangsu) TechnologyLtd

roceSZSE:301072 Return on Capital Employed September 29th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhongjie (Jiangsu) TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Zhongjie (Jiangsu) TechnologyLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Zhongjie (Jiangsu) TechnologyLtd's ROCE Trend?

On the surface, the trend of ROCE at Zhongjie (Jiangsu) TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last four years. However it looks like Zhongjie (Jiangsu) TechnologyLtd 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.

On a side note, Zhongjie (Jiangsu) TechnologyLtd has done well to pay down its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Zhongjie (Jiangsu) TechnologyLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Zhongjie (Jiangsu) TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last year has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Zhongjie (Jiangsu) TechnologyLtd we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.

While Zhongjie (Jiangsu) TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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