There are a few key trends to look for if we want to identify the next 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Henan Zhongyuan Expressway (SHSE:600020) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Henan Zhongyuan Expressway is:

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

0.041 = CN¥1.9b ÷ (CN¥51b - CN¥5.5b) (Based on the trailing twelve months to September 2024).

So, Henan Zhongyuan Expressway has an ROCE of 4.1%. On its own, that's a low figure but it's around the 4.9% average generated by the Infrastructure industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Henan Zhongyuan Expressway's ROCE against it's prior returns. If you're interested in investigating Henan Zhongyuan Expressway's past further, check out this free graph covering Henan Zhongyuan Expressway's past earnings, revenue and cash flow.

What Does the ROCE Trend For Henan Zhongyuan Expressway Tell Us?

On the surface, the trend of ROCE at Henan Zhongyuan Expressway doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.1% from 8.7% 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Henan Zhongyuan Expressway has decreased its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

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 Henan Zhongyuan Expressway. These trends are starting to be recognized by investors since the stock has delivered a 15% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you'd like to know more about Henan Zhongyuan Expressway, we've spotted 3 warning signs, and 2 of them are a bit concerning.

While Henan Zhongyuan Expressway 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.