What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Hangzhou Zhongya Machinery (SZSE:300512) 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. Analysts use this formula to calculate it for Hangzhou Zhongya Machinery:

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

0.001 = CN¥1.8m ÷ (CN¥2.6b - CN¥953m) (Based on the trailing twelve months to June 2024).

Therefore, Hangzhou Zhongya Machinery has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Zhongya Machinery's ROCE against it's prior returns. If you'd like to look at how Hangzhou Zhongya Machinery has performed in the past in other metrics, you can view this free graph of Hangzhou Zhongya Machinery's past earnings, revenue and cash flow.

What Can We Tell From Hangzhou Zhongya Machinery's ROCE Trend?

When we looked at the ROCE trend at Hangzhou Zhongya Machinery, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.3% over the last five years. However it looks like Hangzhou Zhongya Machinery might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Our Take On Hangzhou Zhongya Machinery's ROCE

Bringing it all together, while we're somewhat encouraged by Hangzhou Zhongya Machinery's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Hangzhou Zhongya Machinery has the makings of a multi-bagger.

If you'd like to know more about Hangzhou Zhongya Machinery, we've spotted 3 warning signs, and 1 of them is significant.

While Hangzhou Zhongya Machinery 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.