Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Ergo, when we looked at the ROCE trends at Zhejiang Wellsun Intelligent TechnologyLtd (SZSE:300882), we 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 Wellsun Intelligent TechnologyLtd is:

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

0.22 = CN¥271m ÷ (CN¥1.6b - CN¥373m) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang Wellsun Intelligent TechnologyLtd has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 5.2% earned by companies in a similar industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Wellsun Intelligent TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Zhejiang Wellsun Intelligent TechnologyLtd has performed in the past in other metrics, you can view this free graph of Zhejiang Wellsun Intelligent TechnologyLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

Zhejiang Wellsun Intelligent TechnologyLtd deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 273% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Zhejiang Wellsun Intelligent TechnologyLtd has done well to reduce current liabilities to 23% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

Zhejiang Wellsun Intelligent TechnologyLtd has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Therefore it's no surprise that shareholders have earned a respectable 35% return if they held over the last three years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Zhejiang Wellsun Intelligent TechnologyLtd, we've discovered 2 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com