When seeking a multi-bagger stock, investors often look for underlying trends indicating a company’s robust business model and profitable reinvestment opportunities. In the case of Zhangjiagang Haiguo New Energy Equipment Manufacturing (SZSE:301063), an examination of its Return on Capital Employed (ROCE) reveals some concerning trends.
ROCE, a measure of a company’s annual pre-tax profit relative to the capital employed, stands at 5.8% for Zhangjiagang Haiguo New Energy Equipment Manufacturing. While this figure aligns with the industry average of 6.3%, a deeper analysis raises red flags.
Over the past five years, Zhangjiagang Haiguo New Energy Equipment Manufacturing witnessed a 72% reduction in ROCE, despite deploying 569% more capital. This downward trend is disconcerting, suggesting challenges in generating adequate returns on the increased capital investment. Notably, a recent capital raise could have contributed to the uptick in capital employed, warranting vigilance to observe its impact on future earnings.
Additionally, the company has managed to decrease its current liabilities to 31% of total assets, potentially explaining the decrease in ROCE. While this reduction mitigates some risk, it also implies that the business is relying more on its funds, potentially compromising efficiency in generating ROCE.
Despite the company’s reinvestment efforts, recent market performance reflects skepticism, with a 54% decrease in the stock over the past year. This, coupled with diminishing returns, suggests a lack of market confidence in the company’s trajectory.
In conclusion, while Zhangjiagang Haiguo New Energy Equipment Manufacturing shows signs of reinvestment, the shrinking returns and market sentiment underscore challenges in achieving multi-bagger status. Investors seeking such traits may find more promising opportunities elsewhere. It’s crucial for investors to be mindful of the risks associated with the company, including the recent downward trend in ROCE and market performance.