Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Ningbo Sinyuan Zm Technology (SZSE:301398) and its ROCE trend, we weren't exactly thrilled.
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 Ningbo Sinyuan Zm Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = CN¥62m ÷ (CN¥1.1b - CN¥54m) (Based on the trailing twelve months to September 2023).
Thus, Ningbo Sinyuan Zm Technology has an ROCE of 5.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.
Check out our latest analysis for Ningbo Sinyuan Zm Technology
Above you can see how the current ROCE for Ningbo Sinyuan Zm Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ningbo Sinyuan Zm Technology here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Ningbo Sinyuan Zm Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.9% from 20% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Ningbo Sinyuan Zm Technology has done well to pay down its current liabilities to 4.9% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On Ningbo Sinyuan Zm Technology's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Ningbo Sinyuan Zm Technology is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 2.9% gain to shareholders who've held over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
If you'd like to know more about Ningbo Sinyuan Zm Technology, we've spotted 3 warning signs, and 2 of them are significant.
While Ningbo Sinyuan Zm Technology 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.