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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of China Zhenhua (Group) Science & Technology (SZSE:000733) we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for China Zhenhua (Group) Science & Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = CN¥3.0b ÷ (CN¥15b - CN¥2.8b) (Based on the trailing twelve months to June 2023).
Thus, China Zhenhua (Group) Science & Technology has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Electronic industry average of 5.3%.
See our latest analysis for China Zhenhua (Group) Science & Technology
In the above chart we have measured China Zhenhua (Group) Science & Technology'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 report on analyst forecasts for the company.
How Are Returns Trending?
China Zhenhua (Group) Science & Technology is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 24%. 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 119%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
On a related note, the company's ratio of current liabilities to total assets has decreased to 18%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that China Zhenhua (Group) Science & Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On China Zhenhua (Group) Science & Technology's ROCE
All in all, it's terrific to see that China Zhenhua (Group) Science & Technology is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 519% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if China Zhenhua (Group) Science & Technology can keep these trends up, it could have a bright future ahead.
China Zhenhua (Group) Science & Technology does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.
