Zhiyang Innovation Technology (SHSE:688191) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Zhiyang Innovation Technology (SHSE:688191), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.03 = CN¥28m ÷ (CN¥1.5b - CN¥529m) (Based on the trailing twelve months to June 2024).

Thus, Zhiyang Innovation Technology has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 5.9%.

View our latest analysis for Zhiyang Innovation Technology

Above you can see how the current ROCE for Zhiyang Innovation Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhiyang Innovation Technology .

What Can We Tell From Zhiyang Innovation Technology's ROCE Trend?

On the surface, the trend of ROCE at Zhiyang Innovation Technology doesn't inspire confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 3.0%. 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

In summary, despite lower returns in the short term, we're encouraged to see that Zhiyang Innovation Technology is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing Zhiyang Innovation Technology, we've discovered 2 warning signs that you should be aware of.

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.