Investors Will Want Zhejiang Dun'an Artificial Environment's (SZSE:002011) Growth In ROCE To Persist

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Zhejiang Dun'an Artificial Environment's (SZSE:002011) returns on capital, so let's have a look.

What Is 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. Analysts use this formula to calculate it for Zhejiang Dun'an Artificial Environment:

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

0.18 = CN¥996m ÷ (CN¥11b - CN¥5.3b) (Based on the trailing twelve months to March 2024).

Therefore, Zhejiang Dun'an Artificial Environment has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Building industry average of 7.7% it's much better.

Check out our latest analysis for Zhejiang Dun'an Artificial Environment

Above you can see how the current ROCE for Zhejiang Dun'an Artificial Environment 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 Zhejiang Dun'an Artificial Environment .

What Can We Tell From Zhejiang Dun'an Artificial Environment's ROCE Trend?

Shareholders will be relieved that Zhejiang Dun'an Artificial Environment has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 18% on its capital. While returns have increased, the amount of capital employed by Zhejiang Dun'an Artificial Environment has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a separate but related note, it's important to know that Zhejiang Dun'an Artificial Environment has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. 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.

The Key Takeaway

In summary, we're delighted to see that Zhejiang Dun'an Artificial Environment has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 155% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for 002011 that compares the share price and estimated value.

While Zhejiang Dun'an Artificial Environment 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.