Finding a business that can grow significantly isn’t easy, but certain financial metrics can guide us. Ideally, a company should reinvest its profits and see increasing returns from that investment. However, when we looked at Zhejiang Extek Technology (SZSE:301399), it didn’t quite meet those expectations.
What Is Return On Capital Employed (ROCE)?
ROCE tells us how much profit a company makes from the capital it uses. To figure out ROCE for Zhejiang Extek Technology, we use this formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
For Zhejiang Extek Technology, this works out to:
0.045 = CN¥61m ÷ (CN¥1.5b – CN¥109m) (Based on the trailing twelve months to September 2024).
So, Zhejiang Extek Technology has an ROCE of 4.5%. While this is low, it’s close to the industry average of 5.2% for Machinery.
Even though past performance doesn’t guarantee future results, it provides helpful context. The chart above shows how the company has fared over time. If you’re curious, you can find a free graph that tracks Zhejiang Extek Technology’s earnings, revenue, and cash flow.
How Are Returns Trending?
Looking at the trend of ROCE, we see some troubling signs. Five years ago, returns on capital were an impressive 34%, but now they’ve dropped to 4.5%. This decline, along with increasing capital and falling revenue, raises concerns. It suggests that the company may be losing market share or competitive strength, meaning they’re getting “less bang for their buck.”
Additionally, Zhejiang Extek Technology has reduced its current liabilities to 7.4% of its total assets. This might explain the drop in ROCE. With less reliance on creditors, the company is using more of its own funds, which can make it less efficient in generating returns.
What We Can Learn From Zhejiang Extek Technology’s ROCE
In summary, the decline in returns from increasing capital at Zhejiang Extek Technology is concerning. On a brighter note, despite these issues, the stock has delivered a solid 33% return in the past year. However, given the fundamentals, we wouldn’t recommend investing in this stock right now.
Zhejiang Extek Technology does come with risks, and we’ve identified 2 warning signs that might catch your attention.
If you’re interested in finding solid companies with strong earnings, you might want to explore this free list highlighting companies with solid balance sheets and impressive returns on equity.
Valuation can be tricky, but we can make it simpler.
Check if Zhejiang Extek Technology might be undervalued or overvalued through our detailed analysis that covers fair value estimates, potential risks, dividends, insider trades, and financial health.
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This article by Simply Wall St is general in nature. It offers commentary based on historical data and analyst forecasts, but it is not financial advice. It does not recommend buying or selling any stock based on your personal goals or situation. Our aim is to provide long-term analysis driven by fundamental data. Please note that our analysis might not consider the latest sensitive company updates or qualitative material. Simply Wall St holds no positions in any stocks mentioned.
