Returns Are Gaining Momentum At Zhejiang Shuanghuan DrivelineLtd (SZSE:002472)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Zhejiang Shuanghuan DrivelineLtd (SZSE:002472) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Zhejiang Shuanghuan DrivelineLtd, this is the formula:

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

0.11 = CN¥1.0b ÷ (CN¥14b - CN¥4.4b) (Based on the trailing twelve months to March 2024).

So, Zhejiang Shuanghuan DrivelineLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 6.9% it's much better.

See our latest analysis for Zhejiang Shuanghuan DrivelineLtd

In the above chart we have measured Zhejiang Shuanghuan DrivelineLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Shuanghuan DrivelineLtd .

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Zhejiang Shuanghuan DrivelineLtd. Over the last five years, returns on capital employed have risen substantially to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 61%. 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.

What We Can Learn From Zhejiang Shuanghuan DrivelineLtd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Zhejiang Shuanghuan DrivelineLtd has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Zhejiang Shuanghuan DrivelineLtd looks impressive, no company is worth an infinite price. The intrinsic value infographic for 002472 helps visualize whether it is currently trading for a fair price.

While Zhejiang Shuanghuan DrivelineLtd 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.

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