Zhejiang Goldensea Hi-Tech (SHSE:603311) Will Want To Turn Around Its Return Trends

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Zhejiang Goldensea Hi-Tech (SHSE:603311) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on Zhejiang Goldensea Hi-Tech is:

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

0.028 = CN¥35m ÷ (CN¥1.6b - CN¥316m) (Based on the trailing twelve months to September 2023).

So, Zhejiang Goldensea Hi-Tech has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Building industry average of 6.9%.

See our latest analysis for Zhejiang Goldensea Hi-Tech

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're interested in investigating Zhejiang Goldensea Hi-Tech's past further, check out this free graph covering Zhejiang Goldensea Hi-Tech's past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Goldensea Hi-Tech's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 65%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Zhejiang Goldensea Hi-Tech might not have received a full period of earnings contribution from it.

The Bottom Line On Zhejiang Goldensea Hi-Tech's ROCE

Bringing it all together, while we're somewhat encouraged by Zhejiang Goldensea Hi-Tech's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 32% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Zhejiang Goldensea Hi-Tech we've found 4 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.