Zhejiang VIE Science & Technology (SZSE:002590) Is Doing The Right Things To Multiply Its Share Price

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Zhejiang VIE Science & Technology (SZSE:002590) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Zhejiang VIE Science & Technology is:

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

0.076 = CN¥240m ÷ (CN¥5.8b - CN¥2.7b) (Based on the trailing twelve months to September 2024).

So, Zhejiang VIE Science & Technology has an ROCE of 7.6%. On its own, that's a low figure but it's around the 7.1% average generated by the Auto Components industry.

View our latest analysis for Zhejiang VIE Science & Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Zhejiang VIE Science & Technology has performed in the past in other metrics, you can view this free graph of Zhejiang VIE Science & Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 51% more capital is being employed now too. So we're very much inspired by what we're seeing at Zhejiang VIE Science & Technology thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Zhejiang VIE Science & Technology has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Zhejiang VIE Science & Technology's ROCE

All in all, it's terrific to see that Zhejiang VIE Science & Technology is reaping the rewards from prior investments and is growing its capital base. And a remarkable 101% 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 VIE Science & Technology can keep these trends up, it could have a bright future ahead.

While Zhejiang VIE Science & Technology looks impressive, no company is worth an infinite price. The intrinsic value infographic for 002590 helps visualize whether it is currently trading for a fair price.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.