Zhiyang Innovation Technology's (SHSE:688191) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Zhiyang Innovation Technology (SHSE:688191) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Zhiyang Innovation Technology is:

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

0.051 = CN¥45m ÷ (CN¥1.3b - CN¥413m) (Based on the trailing twelve months to December 2023).

Thus, Zhiyang Innovation Technology has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.5%.

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're interested in investigating Zhiyang Innovation Technology's past further, check out this free graph covering Zhiyang Innovation Technology's past earnings, revenue and cash flow.

So How Is Zhiyang Innovation Technology's ROCE Trending?

In terms of Zhiyang Innovation Technology's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 20%, but since then they've fallen to 5.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From 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. And the stock has followed suit returning a meaningful 20% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing: We've identified 3 warning signs with Zhiyang Innovation Technology (at least 1 which can't be ignored) , and understanding these would certainly be useful.

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.