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. Having said that, from a first glance at Zhejiang FORE Intelligent TechnologyLtd (SZSE:301368) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Zhejiang FORE Intelligent TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = CN¥30m ÷ (CN¥1.2b - CN¥223m) (Based on the trailing twelve months to September 2023).
So, Zhejiang FORE Intelligent TechnologyLtd has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.1%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Zhejiang FORE Intelligent TechnologyLtd has performed in the past in other metrics, you can view this free graph of Zhejiang FORE Intelligent TechnologyLtd's past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at Zhejiang FORE Intelligent TechnologyLtd, we didn't gain much confidence. Around four years ago the returns on capital were 17%, but since then they've fallen to 3.1%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a side note, Zhejiang FORE Intelligent TechnologyLtd has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. 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.
What We Can Learn From Zhejiang FORE Intelligent TechnologyLtd's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Zhejiang FORE Intelligent TechnologyLtd have fallen, meanwhile the business is employing more capital than it was four years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 42% return over the last year, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
On a final note, we found 4 warning signs for Zhejiang FORE Intelligent TechnologyLtd (3 are a bit unpleasant) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.