Returns On Capital At Zhejiang Sanhua Intelligent ControlsLtd (SZSE:002050) Have Stalled

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. 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. That's why when we briefly looked at Zhejiang Sanhua Intelligent ControlsLtd's (SZSE:002050) ROCE trend, we were pretty happy with 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. To calculate this metric for Zhejiang Sanhua Intelligent ControlsLtd, this is the formula:

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

0.17 = CN¥3.6b ÷ (CN¥33b - CN¥11b) (Based on the trailing twelve months to March 2024).

So, Zhejiang Sanhua Intelligent ControlsLtd has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.9% it's much better.

Check out our latest analysis for Zhejiang Sanhua Intelligent ControlsLtd

In the above chart we have measured Zhejiang Sanhua Intelligent ControlsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Sanhua Intelligent ControlsLtd .

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 17% for the last five years, and the capital employed within the business has risen 136% in that time. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Zhejiang Sanhua Intelligent ControlsLtd's ROCE

To sum it up, Zhejiang Sanhua Intelligent ControlsLtd has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 194% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Zhejiang Sanhua Intelligent ControlsLtd, we've discovered 2 warning signs that you should be aware of.

While Zhejiang Sanhua Intelligent ControlsLtd 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.