If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Zhejiang Wansheng (SHSE:603010), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Zhejiang Wansheng:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.04 = CN¥204m ÷ (CN¥6.5b - CN¥1.3b) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang Wansheng has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

Above you can see how the current ROCE for Zhejiang Wansheng 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 analyst report for Zhejiang Wansheng .

What Does the ROCE Trend For Zhejiang Wansheng Tell Us?

When we looked at the ROCE trend at Zhejiang Wansheng, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.0% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

In summary, we're somewhat concerned by Zhejiang Wansheng's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 36% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we've found 1 warning sign for Zhejiang Wansheng that we think you should be aware of.

While Zhejiang Wansheng 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.