Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Chongqing Zongshen Power MachineryLtd (SZSE:001696), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Chongqing Zongshen Power MachineryLtd:

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

0.068 = CN¥560m ÷ (CN¥11b - CN¥2.9b) (Based on the trailing twelve months to June 2024).

Thus, Chongqing Zongshen Power MachineryLtd has an ROCE of 6.8%. On its own, that's a low figure but it's around the 7.5% average generated by the Auto Components industry.

Above you can see how the current ROCE for Chongqing Zongshen Power MachineryLtd 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 Chongqing Zongshen Power MachineryLtd for free.

What Can We Tell From Chongqing Zongshen Power MachineryLtd's ROCE Trend?

In terms of Chongqing Zongshen Power MachineryLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.8% from 9.7% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Chongqing Zongshen Power MachineryLtd. And long term investors must be optimistic going forward because the stock has returned a huge 141% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Chongqing Zongshen Power MachineryLtd we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Chongqing Zongshen Power MachineryLtd 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.