We Like These Underlying Return On Capital Trends At Zhenhai Petrochemical Engineering (SHSE:603637)

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Zhenhai Petrochemical Engineering (SHSE:603637) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Zhenhai Petrochemical Engineering, this is the formula:

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

0.08 = CN¥80m ÷ (CN¥1.4b - CN¥381m) (Based on the trailing twelve months to September 2024).

Thus, Zhenhai Petrochemical Engineering has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 6.1%.

Check out our latest analysis for Zhenhai Petrochemical Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhenhai Petrochemical Engineering's ROCE against it's prior returns. If you're interested in investigating Zhenhai Petrochemical Engineering's past further, check out this free graph covering Zhenhai Petrochemical Engineering's past earnings, revenue and cash flow.

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 30% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Zhenhai Petrochemical Engineering has. Since the stock has only returned 4.3% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 1 warning sign for Zhenhai Petrochemical Engineering you'll probably want to know about.

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.