Zhejiang Yinlun MachineryLtd (SZSE:002126) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Zhejiang Yinlun MachineryLtd (SZSE:002126) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Zhejiang Yinlun MachineryLtd is:

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).

Thus, 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 7.0% it's much better.

See 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Yinlun MachineryLtd .

So How Is Zhejiang Yinlun MachineryLtd's ROCE Trending?

Investors would be pleased with what's happening at Zhejiang Yinlun MachineryLtd. The data shows that returns on capital have increased substantially over the last five years to 12%. The amount of capital employed has increased too, by 83%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, Zhejiang Yinlun MachineryLtd has a high ratio of current liabilities to total assets of 53%. 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

In summary, it's great to see that Zhejiang Yinlun MachineryLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 155% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 1 warning sign for Zhejiang Yinlun MachineryLtd that we think you should be aware of.

While Zhejiang Yinlun MachineryLtd 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.