If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Zhejiang Liming Intelligent ManufacturingLtd (SHSE:603048), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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 Zhejiang Liming Intelligent ManufacturingLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = CN¥22m ÷ (CN¥1.6b - CN¥259m) (Based on the trailing twelve months to September 2023).
So, Zhejiang Liming Intelligent ManufacturingLtd has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 5.8%.
Check out our latest analysis for Zhejiang Liming Intelligent ManufacturingLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Liming Intelligent ManufacturingLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Zhejiang Liming Intelligent ManufacturingLtd, check out these free graphs here.
How Are Returns Trending?
When we looked at the ROCE trend at Zhejiang Liming Intelligent ManufacturingLtd, we didn't gain much confidence. Around two years ago the returns on capital were 19%, but since then they've fallen to 1.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Zhejiang Liming Intelligent ManufacturingLtd has decreased its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. 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.
The Bottom Line On Zhejiang Liming Intelligent ManufacturingLtd's ROCE
While returns have fallen for Zhejiang Liming Intelligent ManufacturingLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 4.2% over the last year. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
If you'd like to know more about Zhejiang Liming Intelligent ManufacturingLtd, we've spotted 2 warning signs, and 1 of them is significant.
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.
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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.