Returns On Capital Are Showing Encouraging Signs At ShenZhen Woer Heat-Shrinkable MaterialLtd (SZSE:002130)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at ShenZhen Woer Heat-Shrinkable MaterialLtd (SZSE:002130) and its trend of ROCE, we really liked what we saw.

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

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. The formula for this calculation on ShenZhen Woer Heat-Shrinkable MaterialLtd is:

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

0.12 = CN¥760m ÷ (CN¥8.7b - CN¥2.6b) (Based on the trailing twelve months to September 2023).

So, ShenZhen Woer Heat-Shrinkable MaterialLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.3% generated by the Electrical industry.

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'd like, you can check out the forecasts from the analysts covering ShenZhen Woer Heat-Shrinkable MaterialLtd for free.

How Are Returns Trending?

The trends we've noticed at ShenZhen Woer Heat-Shrinkable MaterialLtd are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 66%. 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 30%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On ShenZhen Woer Heat-Shrinkable MaterialLtd's ROCE

To sum it up, ShenZhen Woer Heat-Shrinkable MaterialLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 50% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 002130 on our platform that is definitely worth checking out.

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.