Return Trends At Hangzhou XZB Tech (SHSE:603040) Aren't Appealing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So, when we ran our eye over Hangzhou XZB Tech's (SHSE:603040) trend of ROCE, we liked 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 Hangzhou XZB Tech is:

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

0.15 = CN¥186m ÷ (CN¥1.4b - CN¥162m) (Based on the trailing twelve months to September 2023).

Thus, Hangzhou XZB Tech has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.8% generated by the Auto Components industry.

See our latest analysis for Hangzhou XZB Tech

Above you can see how the current ROCE for Hangzhou XZB Tech compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hangzhou XZB Tech .

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has employed 87% more capital in the last five years, and the returns on that capital have remained stable at 15%. 15% is a pretty standard return, and it provides some comfort knowing that Hangzhou XZB Tech has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

In the end, Hangzhou XZB Tech has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 38% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Hangzhou XZB Tech is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On a final note, we've found 1 warning sign for Hangzhou XZB Tech that we think you should be aware of.

While Hangzhou XZB Tech 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.