Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Having said that, from a first glance at Zoomlion Heavy Industry Science and Technology (SZSE:000157) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. The formula for this calculation on Zoomlion Heavy Industry Science and Technology is:

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

0.038 = CN¥3.2b ÷ (CN¥133b - CN¥50b) (Based on the trailing twelve months to March 2024).

Therefore, Zoomlion Heavy Industry Science and Technology has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.7%.

Above you can see how the current ROCE for Zoomlion Heavy Industry Science and Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zoomlion Heavy Industry Science and Technology for free.

So How Is Zoomlion Heavy Industry Science and Technology's ROCE Trending?

On the surface, the trend of ROCE at Zoomlion Heavy Industry Science and Technology doesn't inspire confidence. Around five years ago the returns on capital were 7.0%, but since then they've fallen to 3.8%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Zoomlion Heavy Industry Science and Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zoomlion Heavy Industry Science and Technology is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 48% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we've found 3 warning signs for Zoomlion Heavy Industry Science and Technology that we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.