Returns On Capital At Chongqing Zongshen Power MachineryLtd (SZSE:001696) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 Chongqing Zongshen Power MachineryLtd (SZSE:001696), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Chongqing Zongshen Power MachineryLtd is:

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

0.059 = CN¥491m ÷ (CN¥11b - CN¥2.9b) (Based on the trailing twelve months to June 2024).

Therefore, Chongqing Zongshen Power MachineryLtd has an ROCE of 5.9%. On its own, that's a low figure but it's around the 7.2% average generated by the Auto Components industry.

View our latest analysis for Chongqing Zongshen Power MachineryLtd

In the above chart we have measured Chongqing Zongshen Power MachineryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Chongqing Zongshen Power MachineryLtd for free.

What Does the ROCE Trend For Chongqing Zongshen Power MachineryLtd Tell Us?

In terms of Chongqing Zongshen Power MachineryLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.9% from 9.7% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Chongqing Zongshen Power MachineryLtd is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 200% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Chongqing Zongshen Power MachineryLtd does have some risks though, and we've spotted 2 warning signs for Chongqing Zongshen Power MachineryLtd that you might be interested in.

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.

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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.