Returns On Capital Are Showing Encouraging Signs At Zhejiang Shuanghuan DrivelineLtd (SZSE:002472)

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. 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?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.085 = CN¥801m ÷ (CN¥13b - CN¥3.8b) (Based on the trailing twelve months to September 2023).

Therefore, Zhejiang Shuanghuan DrivelineLtd has an ROCE of 8.5%. On its own that's a low return, but compared to the average of 5.8% generated by the Auto Components industry, it's much better.

View our latest analysis for Zhejiang Shuanghuan DrivelineLtd

Above you can see how the current ROCE for Zhejiang Shuanghuan DrivelineLtd 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 Shuanghuan DrivelineLtd .

What Can We Tell From Zhejiang Shuanghuan DrivelineLtd's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 75% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

To sum it up, Zhejiang Shuanghuan DrivelineLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 216% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Zhejiang Shuanghuan DrivelineLtd can keep these trends up, it could have a bright future ahead.

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.

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.