If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Zhejiang Huatie Emergency Equipment Science & TechnologyLtd (SHSE:603300), we don't think it's current trends fit the mold of a multi-bagger.
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 Huatie Emergency Equipment Science & TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = CN¥1.2b ÷ (CN¥18b - CN¥5.5b) (Based on the trailing twelve months to September 2023).
So, Zhejiang Huatie Emergency Equipment Science & TechnologyLtd has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Trade Distributors industry average of 7.3%.
View our latest analysis for Zhejiang Huatie Emergency Equipment Science & TechnologyLtd
In the above chart we have measured Zhejiang Huatie Emergency Equipment Science & 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 Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's ROCE Trend?
There are better returns on capital out there than what we're seeing at Zhejiang Huatie Emergency Equipment Science & TechnologyLtd. Over the past five years, ROCE has remained relatively flat at around 9.5% and the business has deployed 199% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's ROCE
In summary, Zhejiang Huatie Emergency Equipment Science & TechnologyLtd has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 227% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing, we've spotted 2 warning signs facing Zhejiang Huatie Emergency Equipment Science & TechnologyLtd that you might find interesting.
While Zhejiang Huatie Emergency Equipment Science & TechnologyLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
