Zhejiang Yinlun MachineryLtd (SZSE:002126) Might Have The Makings Of A Multi-Bagger

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Zhejiang Yinlun MachineryLtd (SZSE:002126) so let's look a bit deeper.

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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. Analysts use this formula to calculate it for Zhejiang Yinlun MachineryLtd:

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

0.12 = CN¥976m ÷ (CN¥17b - CN¥9.2b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Yinlun MachineryLtd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 7.1% it's much better.

Check out our latest analysis for Zhejiang Yinlun MachineryLtd

Above you can see how the current ROCE for Zhejiang Yinlun MachineryLtd 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 Zhejiang Yinlun MachineryLtd .

What Does the ROCE Trend For Zhejiang Yinlun MachineryLtd Tell Us?

Zhejiang Yinlun MachineryLtd is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 83%. So we're very much inspired by what we're seeing at Zhejiang Yinlun MachineryLtd thanks to its ability to profitably reinvest capital.

On a side note, Zhejiang Yinlun MachineryLtd's current liabilities are still rather high at 53% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Zhejiang Yinlun MachineryLtd's ROCE

To sum it up, Zhejiang Yinlun MachineryLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 1 warning sign with Zhejiang Yinlun MachineryLtd and understanding it should be part of your investment process.

While Zhejiang Yinlun MachineryLtd 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.