If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at China Zhenhua (Group) Science & Technology (SZSE:000733) and its trend of ROCE, we really liked what we saw.
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. To calculate this metric for China Zhenhua (Group) Science & Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CN¥2.9b ÷ (CN¥18b - CN¥2.7b) (Based on the trailing twelve months to September 2023).
Thus, China Zhenhua (Group) Science & Technology has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.0% it's much better.
View our latest analysis for China Zhenhua (Group) Science & Technology
Above you can see how the current ROCE for China Zhenhua (Group) Science & Technology 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 report for China Zhenhua (Group) Science & Technology.
What The Trend Of ROCE Can Tell Us
The trends we've noticed at China Zhenhua (Group) Science & Technology are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 167% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a related note, the company's ratio of current liabilities to total assets has decreased to 15%, 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.
What We Can Learn From China Zhenhua (Group) Science & Technology's ROCE
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 China Zhenhua (Group) Science & Technology has. And a remarkable 426% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.
China Zhenhua (Group) Science & Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
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.
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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.