Returns On Capital Are Showing Encouraging Signs At Zhejiang Jinggong Integration Technology (SZSE:002006)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Zhejiang Jinggong Integration Technology (SZSE:002006) and its trend of ROCE, we really liked what we saw.

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

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 Zhejiang Jinggong Integration Technology is:

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

0.11 = CN¥152m ÷ (CN¥2.7b - CN¥1.3b) (Based on the trailing twelve months to June 2024).

So, Zhejiang Jinggong Integration Technology has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Machinery industry.

Check out our latest analysis for Zhejiang Jinggong Integration Technology

Above you can see how the current ROCE for Zhejiang Jinggong Integration 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 Zhejiang Jinggong Integration Technology .

What Can We Tell From Zhejiang Jinggong Integration Technology's ROCE Trend?

We're delighted to see that Zhejiang Jinggong Integration Technology is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 11% on its capital. Not only that, but the company is utilizing 38% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, Zhejiang Jinggong Integration Technology's current liabilities are still rather high at 50% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Zhejiang Jinggong Integration Technology's ROCE

Long story short, we're delighted to see that Zhejiang Jinggong Integration Technology's reinvestment activities have paid off and the company is now profitable. And a remarkable 153% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 2 warning signs for Zhejiang Jinggong Integration Technology that we think 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.