If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Zhuzhou Kibing GroupLtd (SHSE:601636) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. The formula for this calculation on Zhuzhou Kibing GroupLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = CN¥785m ÷ (CN¥28b - CN¥6.0b) (Based on the trailing twelve months to June 2023).
Therefore, Zhuzhou Kibing GroupLtd has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Building industry average of 6.5%.
In the above chart we have measured Zhuzhou Kibing GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zhuzhou Kibing GroupLtd for free.
So How Is Zhuzhou Kibing GroupLtd's ROCE Trending?
When we looked at the ROCE trend at Zhuzhou Kibing GroupLtd, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 3.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
In summary, Zhuzhou Kibing GroupLtd 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 114% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Zhuzhou Kibing GroupLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...
While Zhuzhou Kibing GroupLtd 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.