Zhejiang Dun'an Artificial Environment (SZSE:002011) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Zhejiang Dun'an Artificial Environment is:

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 7.2% it's much better.

View 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 .

So How Is Zhejiang Dun'an Artificial Environment's ROCE Trending?

Zhejiang Dun'an Artificial Environment has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 18% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

On a side note, Zhejiang Dun'an Artificial Environment's current liabilities are still rather high at 49% 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 Dun'an Artificial Environment's ROCE

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 solid 97% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Zhejiang Dun'an Artificial Environment looks impressive, no company is worth an infinite price. The intrinsic value infographic for 002011 helps visualize whether it is currently trading for a fair price.

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.