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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Zhejiang Sanhua Intelligent ControlsLtd's (SZSE:002050) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Zhejiang Sanhua Intelligent ControlsLtd is:

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

0.17 = CN¥3.6b ÷ (CN¥33b - CN¥11b) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang Sanhua Intelligent ControlsLtd has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 5.7% generated by the Machinery industry.

Above you can see how the current ROCE for Zhejiang Sanhua Intelligent ControlsLtd 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 Zhejiang Sanhua Intelligent ControlsLtd for free.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has employed 136% more capital in the last five years, and the returns on that capital have remained stable at 17%. 17% is a pretty standard return, and it provides some comfort knowing that Zhejiang Sanhua Intelligent ControlsLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

The main thing to remember is that Zhejiang Sanhua Intelligent ControlsLtd has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 94% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

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

While Zhejiang Sanhua Intelligent ControlsLtd 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.