If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Zhuhai CosMX Battery (SHSE:688772), it didn't seem to tick all of these boxes.
Understanding 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. To calculate this metric for Zhuhai CosMX Battery, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = CN¥134m ÷ (CN¥22b - CN¥9.8b) (Based on the trailing twelve months to September 2023).
So, Zhuhai CosMX Battery has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.3%.
View our latest analysis for Zhuhai CosMX Battery
Above you can see how the current ROCE for Zhuhai CosMX Battery compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Zhuhai CosMX Battery's ROCE Trending?
On the surface, the trend of ROCE at Zhuhai CosMX Battery doesn't inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. However it looks like Zhuhai CosMX Battery 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 may take some time before the company starts to see any change in earnings from these investments.
On a related note, Zhuhai CosMX Battery has decreased its current liabilities to 45% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.
In Conclusion...
To conclude, we've found that Zhuhai CosMX Battery is reinvesting in the business, but returns have been falling. Since the stock has declined 13% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Zhuhai CosMX Battery has the makings of a multi-bagger.
One more thing to note, we've identified 1 warning sign with Zhuhai CosMX Battery and understanding this should be part of your investment process.
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.