Zhenhai Petrochemical Engineering (SHSE:603637) Is Experiencing Growth In Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Zhenhai Petrochemical Engineering (SHSE:603637) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Zhenhai Petrochemical Engineering:

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

0.062 = CN¥60m ÷ (CN¥1.4b - CN¥394m) (Based on the trailing twelve months to June 2024).

So, Zhenhai Petrochemical Engineering has an ROCE of 6.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.7%.

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'd like to look at how Zhenhai Petrochemical Engineering has performed in the past in other metrics, you can view this free graph of Zhenhai Petrochemical Engineering's past earnings, revenue and cash flow.

What Does the ROCE Trend For Zhenhai Petrochemical Engineering Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 6.2%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 31%. So we're very much inspired by what we're seeing at Zhenhai Petrochemical Engineering thanks to its ability to profitably reinvest capital.

The Key Takeaway

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. Given the stock has declined 35% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Zhenhai Petrochemical Engineering does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Zhenhai Petrochemical Engineering 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.