What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Zhejiang Weixing Industrial Development (SZSE:002003) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Zhejiang Weixing Industrial Development:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥532m ÷ (CN¥6.4b - CN¥1.7b) (Based on the trailing twelve months to September 2023).
So, Zhejiang Weixing Industrial Development has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 5.3% it's much better.
View our latest analysis for Zhejiang Weixing Industrial Development
In the above chart we have measured Zhejiang Weixing Industrial Development's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Zhejiang Weixing Industrial Development.
The Trend Of ROCE
Unfortunately, the trend isn't great with ROCE falling from 20% five years ago, while capital employed has grown 89%. Usually this isn't ideal, but given Zhejiang Weixing Industrial Development conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Zhejiang Weixing Industrial Development's earnings and if they change as a result from the capital raise.
The Bottom Line On Zhejiang Weixing Industrial Development's ROCE
In summary, Zhejiang Weixing Industrial Development is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 140% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing to note, we've identified 2 warning signs with Zhejiang Weixing Industrial Development and understanding them should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.