Returns On Capital At Zhejiang Wanfeng Auto Wheel (SZSE:002085) Have Hit The Brakes

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. That's why when we briefly looked at Zhejiang Wanfeng Auto Wheel's (SZSE:002085) ROCE trend, we were pretty happy with what we saw.

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 Zhejiang Wanfeng Auto Wheel, this is the formula:

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

0.12 = CN¥1.5b ÷ (CN¥18b - CN¥6.1b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Wanfeng Auto Wheel has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Auto Components industry.

Check out our latest analysis for Zhejiang Wanfeng Auto Wheel

Above you can see how the current ROCE for Zhejiang Wanfeng Auto Wheel compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Wanfeng Auto Wheel for free.

So How Is Zhejiang Wanfeng Auto Wheel's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 37% in that time. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Zhejiang Wanfeng Auto Wheel's ROCE

In the end, Zhejiang Wanfeng Auto Wheel has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 223% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 3 warning signs facing Zhejiang Wanfeng Auto Wheel that you might find interesting.

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.