If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at ShenZhen Woer Heat-Shrinkable MaterialLtd (SZSE:002130) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on ShenZhen Woer Heat-Shrinkable MaterialLtd is:

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

0.15 = CN¥989m ÷ (CN¥9.2b - CN¥2.6b) (Based on the trailing twelve months to March 2024).

So, ShenZhen Woer Heat-Shrinkable MaterialLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.0% it's much better.

In the above chart we have measured ShenZhen Woer Heat-Shrinkable MaterialLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for ShenZhen Woer Heat-Shrinkable MaterialLtd .

What Can We Tell From ShenZhen Woer Heat-Shrinkable MaterialLtd's ROCE Trend?

Investors would be pleased with what's happening at ShenZhen Woer Heat-Shrinkable MaterialLtd. The data shows that returns on capital have increased substantially over the last five years to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 84%. So we're very much inspired by what we're seeing at ShenZhen Woer Heat-Shrinkable MaterialLtd thanks to its ability to profitably reinvest capital.

One more thing to note, ShenZhen Woer Heat-Shrinkable MaterialLtd has decreased current liabilities to 29% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that ShenZhen Woer Heat-Shrinkable MaterialLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what ShenZhen Woer Heat-Shrinkable MaterialLtd has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing ShenZhen Woer Heat-Shrinkable MaterialLtd we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

While ShenZhen Woer Heat-Shrinkable MaterialLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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