Returns At ShenZhen Woer Heat-Shrinkable MaterialLtd (SZSE:002130) Are On The Way Up

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at ShenZhen Woer Heat-Shrinkable MaterialLtd (SZSE:002130) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for ShenZhen Woer Heat-Shrinkable MaterialLtd:

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

0.15 = CN¥989m ÷ (CN¥9.2b - CN¥2.6b) (Based on the trailing twelve months to March 2024).

Thus, ShenZhen Woer Heat-Shrinkable MaterialLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.0% it's much better.

View our latest analysis for ShenZhen Woer Heat-Shrinkable MaterialLtd

In the above chart we have measured ShenZhen Woer Heat-Shrinkable MaterialLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for ShenZhen Woer Heat-Shrinkable MaterialLtd .

How Are Returns Trending?

ShenZhen Woer Heat-Shrinkable MaterialLtd is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 15%. The amount of capital employed has increased too, by 84%. So we're very much inspired by what we're seeing at ShenZhen Woer Heat-Shrinkable MaterialLtd thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 29%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that ShenZhen Woer Heat-Shrinkable MaterialLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From ShenZhen Woer Heat-Shrinkable MaterialLtd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what ShenZhen Woer Heat-Shrinkable MaterialLtd has. Since the stock has returned a staggering 236% 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.

ShenZhen Woer Heat-Shrinkable MaterialLtd does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While ShenZhen Woer Heat-Shrinkable MaterialLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com