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

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Hangzhou Zhengqiang (SZSE:301119) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Hangzhou Zhengqiang is:

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

0.08 = CN¥84m ÷ (CN¥1.4b - CN¥351m) (Based on the trailing twelve months to September 2024).

Thus, Hangzhou Zhengqiang has an ROCE of 8.0%. On its own, that's a low figure but it's around the 7.0% average generated by the Auto Components industry.

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're interested in investigating Hangzhou Zhengqiang's past further, check out this free graph covering Hangzhou Zhengqiang's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Hangzhou Zhengqiang, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 8.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Bottom Line

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. Since the stock has gained an impressive 27% over the last three years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Hangzhou Zhengqiang could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 301119 on our platform quite valuable.

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.