Zoomlion Heavy Industry Science and Technology (SZSE:000157) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Zoomlion Heavy Industry Science and Technology (SZSE:000157) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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 Zoomlion Heavy Industry Science and Technology is:

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

0.036 = CN¥2.9b ÷ (CN¥129b - CN¥48b) (Based on the trailing twelve months to September 2024).

Thus, Zoomlion Heavy Industry Science and Technology has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

See our latest analysis for Zoomlion Heavy Industry Science and Technology

Above you can see how the current ROCE for Zoomlion Heavy Industry Science and Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zoomlion Heavy Industry Science and Technology .

How Are Returns Trending?

On the surface, the trend of ROCE at Zoomlion Heavy Industry Science and Technology doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 3.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Zoomlion Heavy Industry Science and Technology has done well to pay down its current liabilities to 37% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Zoomlion Heavy Industry Science and Technology's ROCE

In summary, Zoomlion Heavy Industry Science and Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 44% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 2 warning signs with Zoomlion Heavy Industry Science and Technology and understanding them should be part of your investment process.

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.