Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Zhenjiang Dongfang Electric Heating TechnologyLtd (SZSE:300217) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhenjiang Dongfang Electric Heating TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥418m ÷ (CN¥7.5b - CN¥3.6b) (Based on the trailing twelve months to September 2023).
So, Zhenjiang Dongfang Electric Heating TechnologyLtd has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.7% generated by the Consumer Durables industry.
See our latest analysis for Zhenjiang Dongfang Electric Heating TechnologyLtd
In the above chart we have measured Zhenjiang Dongfang Electric Heating TechnologyLtd'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.
What Can We Tell From Zhenjiang Dongfang Electric Heating TechnologyLtd's ROCE Trend?
Investors would be pleased with what's happening at Zhenjiang Dongfang Electric Heating TechnologyLtd. The data shows that returns on capital have increased substantially over the last five years to 11%. The amount of capital employed has increased too, by 66%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 47% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
Our Take On Zhenjiang Dongfang Electric Heating TechnologyLtd's ROCE
To sum it up, Zhenjiang Dongfang Electric Heating TechnologyLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 126% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
Zhenjiang Dongfang Electric Heating TechnologyLtd does have some risks though, and we've spotted 1 warning sign for Zhenjiang Dongfang Electric Heating TechnologyLtd that you might be interested in.
While Zhenjiang Dongfang Electric Heating TechnologyLtd 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.