Zhiyang Innovation Technology (SHSE:688191) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Zhiyang Innovation Technology (SHSE:688191), it didn't seem to tick all of these boxes.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Zhiyang Innovation Technology, this is the formula:

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

0.055 = CN¥53m ÷ (CN¥1.5b - CN¥548m) (Based on the trailing twelve months to December 2024).

Therefore, Zhiyang Innovation Technology has an ROCE of 5.5%. Even though it's in line with the industry average of 5.9%, it's still a low return by itself.

View our latest analysis for Zhiyang Innovation Technology

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

What The Trend Of ROCE Can Tell Us

In terms of Zhiyang Innovation Technology's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.5% from 31% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Zhiyang Innovation Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhiyang Innovation Technology. Furthermore the stock has climbed 67% over the last three years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Zhiyang Innovation Technology, we've spotted 3 warning signs, and 2 of them are potentially serious.

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.