Investors Could Be Concerned With Zhe Jiang Headman MachineryLtd's (SHSE:688577) Returns On Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Zhe Jiang Headman MachineryLtd (SHSE:688577), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Zhe Jiang Headman MachineryLtd is:

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

0.015 = CN¥15m ÷ (CN¥1.5b - CN¥512m) (Based on the trailing twelve months to March 2024).

Thus, Zhe Jiang Headman MachineryLtd has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.

View our latest analysis for Zhe Jiang Headman MachineryLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhe Jiang Headman MachineryLtd's past further, check out this free graph covering Zhe Jiang Headman MachineryLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Zhe Jiang Headman MachineryLtd Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 21% five years ago, while capital employed has grown 204%. That being said, Zhe Jiang Headman MachineryLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Zhe Jiang Headman MachineryLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Key Takeaway

To conclude, we've found that Zhe Jiang Headman MachineryLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 12% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 5 warning signs with Zhe Jiang Headman MachineryLtd (at least 2 which are potentially serious) , and understanding these would certainly be useful.

While Zhe Jiang Headman MachineryLtd 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.

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