Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Ziel Home Furnishing Technology (SZSE:301376), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Ziel Home Furnishing Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥438m ÷ (CN¥6.2b - CN¥2.2b) (Based on the trailing twelve months to September 2024).
Thus, Ziel Home Furnishing Technology has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.5% generated by the Consumer Durables industry.
In the above chart we have measured Ziel Home Furnishing Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ziel Home Furnishing Technology .
The Trend Of ROCE
When we looked at the ROCE trend at Ziel Home Furnishing Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 33% over the last five years. 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.
Our Take On Ziel Home Furnishing Technology's ROCE
While returns have fallen for Ziel Home Furnishing Technology in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 17% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
One more thing, we've spotted 1 warning sign facing Ziel Home Furnishing Technology that you might find interesting.
While Ziel Home Furnishing Technology 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.
