If you’re not sure where to start in your search for the next multi-bagger, there are some key trends to look out for. Two in particular should be on your radar: first, the increasing return on invested capital (ROCE), and second, the growing amount of invested capital. This suggests that the company is a compounding machine, able to continually reinvest earnings back into the business to generate higher returns. However, a quick look at the numbers suggests that Zhejiang Hongchang Electric Appliance Technology Co., Ltd. (SZSE:301008) doesn’t seem like it has what it takes to become a multi-bagger in the future, but let’s see why.
What is Return on Invested Capital (ROCE)?
For those new to ROCE, it measures the “return on investment” (profit before tax) a company generates from the capital it has put into its business: The formula for calculating this metric for Zhejiang Hongchang Electrical Technology is:
Return on Invested Capital = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.062 = CNY920m ÷ (CNY200m – CNY498m) (Based on the trailing twelve months to March 2024).
Zhejiang Hongchang Electric Appliance Technology’s ROCE is 6.2%, which is a low return on capital on a standalone basis, but is on par with the industry average of 6.0%.
Check out our latest analysis for Zhejiang Hongchang Electrical Technology
SZSE:301008 Return on equity July 28, 2024
The past is no indicator of the future, but it is useful to know how a company has performed in the past, which is why we have prepared the graph above. If you would like to investigate Zhejiang Hongchang Electric Appliance Technology’s past in more detail, you can take a look at this free graph of Zhejiang Hongchang Electric Appliance Technology’s past earnings, revenue and cash flow.
So how is Zhejiang Hongchang Electric Technology’s ROCE trending?
Looking at Zhejiang Hongchang Electric Appliance Technology’s historical ROCE trend, the trend is not stellar. About five years ago, return on capital was 19%, but has since fallen to 6.2%. However, given that invested capital and revenues are both increasing, it appears the company is currently pursuing growth at the expense of short-term profits. If these investments prove successful, this would bode very well for the long-term share price performance.
As an aside, Zhejiang Hongchang Electric Appliance Technology has managed to reduce its current liabilities to 25% of its total assets. Therefore, some of this may be related to the decrease in ROCE. Additionally, this reduces the company’s suppliers and short-term creditors from funding its operations, thereby reducing some of the risk in the business. The company is essentially funding an increasing proportion of its operations with its own funds, which could be said to have made it less efficient at generating ROCE.
What we can learn from Zhejiang Hongchang Electric Technology’s ROCE
In summary, despite low earnings in the short term, it’s good to see Zhejiang Hongchang Electric Appliance Technology is reinvesting in growth and therefore increasing sales. However, despite the encouraging trends, the share price has fallen 25% over the past three years, so there may be an opportunity for astute investors. We therefore recommend researching this stock further to uncover what the other fundamentals of this business can tell us.
However, Zhejiang Hongchang Electric Technology Co., Ltd. does carry some risks. Our investment analysis identifies 3 warning signs, 2 of which are significant…
Zhejiang Hongchang Electric Technology doesn’t have the highest profit margins, but check out this free list of companies with solid balance sheets and high return on equity.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
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