Hangzhou Zhengqiang's (SZSE:301119) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Hangzhou Zhengqiang (SZSE:301119), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hangzhou Zhengqiang:

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

0.093 = CN¥94m ÷ (CN¥1.3b - CN¥244m) (Based on the trailing twelve months to March 2024).

So, Hangzhou Zhengqiang has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 6.9% generated by the Auto Components industry, it's much better.

See our latest analysis for Hangzhou Zhengqiang

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hangzhou Zhengqiang's ROCE against it's prior returns. If you'd like to look at how Hangzhou Zhengqiang has performed in the past in other metrics, you can view this free graph of Hangzhou Zhengqiang's past earnings, revenue and cash flow.

So How Is Hangzhou Zhengqiang's ROCE Trending?

In terms of Hangzhou Zhengqiang's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% over the last five years. However it looks like Hangzhou Zhengqiang might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Hangzhou Zhengqiang's ROCE

In summary, Hangzhou Zhengqiang is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last year. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

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

While Hangzhou Zhengqiang 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.