If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Zhejiang Dun'an Artificial Environment (SZSE:002011) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Zhejiang Dun'an Artificial Environment is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.18 = CN¥807m ÷ (CN¥10b - CN¥5.7b) (Based on the trailing twelve months to September 2023).

Therefore, Zhejiang Dun'an Artificial Environment has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Building industry average of 6.4% it's much better.

In the above chart we have measured Zhejiang Dun'an Artificial Environment's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Dun'an Artificial Environment for free.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at Zhejiang Dun'an Artificial Environment. The figures show that over the last five years, returns on capital have grown by 347%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Zhejiang Dun'an Artificial Environment appears to been achieving more with less, since the business is using 27% less capital to run its operation. Zhejiang Dun'an Artificial Environment may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, Zhejiang Dun'an Artificial Environment's current liabilities are still rather high at 57% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In a nutshell, we're pleased to see that Zhejiang Dun'an Artificial Environment has been able to generate higher returns from less capital. And a remarkable 117% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Zhejiang Dun'an Artificial Environment does have some risks though, and we've spotted 1 warning sign for Zhejiang Dun'an Artificial Environment that you might be interested in.

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.