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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Zhejiang Dun'an Artificial Environment (SZSE:002011) so let's look a bit deeper.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Zhejiang Dun'an Artificial Environment, this is the formula:

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

0.17 = CN¥980m ÷ (CN¥12b - CN¥5.8b) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang Dun'an Artificial Environment has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Building industry average of 7.3% it's much better.

Above you can see how the current ROCE for Zhejiang Dun'an Artificial Environment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Dun'an Artificial Environment .

The Trend Of ROCE

Zhejiang Dun'an Artificial Environment has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 17% which is a sight for sore eyes. In addition to that, Zhejiang Dun'an Artificial Environment is employing 21% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a separate but related note, it's important to know that Zhejiang Dun'an Artificial Environment has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Long story short, we're delighted to see that Zhejiang Dun'an Artificial Environment's reinvestment activities have paid off and the company is now profitable. And a remarkable 143% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Zhejiang Dun'an Artificial Environment looks impressive, no company is worth an infinite price. The intrinsic value infographic for 002011 helps visualize whether it is currently trading for a fair price.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.