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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Zhengzhou Coal Mining Machinery Group's (SHSE:601717) returns on capital, so let's have a look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Zhengzhou Coal Mining Machinery Group is:

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

0.17 = CN¥5.0b ÷ (CN¥49b - CN¥19b) (Based on the trailing twelve months to September 2024).

Thus, Zhengzhou Coal Mining Machinery Group has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Machinery industry.

Above you can see how the current ROCE for Zhengzhou Coal Mining Machinery Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhengzhou Coal Mining Machinery Group .

So How Is Zhengzhou Coal Mining Machinery Group's ROCE Trending?

Zhengzhou Coal Mining Machinery Group is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 72% more capital is being employed now too. So we're very much inspired by what we're seeing at Zhengzhou Coal Mining Machinery Group thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Zhengzhou Coal Mining Machinery Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

One more thing, we've spotted 1 warning sign facing Zhengzhou Coal Mining Machinery Group that you might find interesting.

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.

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