Zhejiang Weixing New Building Materials (SZSE:002372) Knows How To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 Weixing New Building Materials' (SZSE:002372) ROCE trend, we were very happy with 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. To calculate this metric for Zhejiang Weixing New Building Materials, this is the formula:

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

0.31 = CN¥1.7b ÷ (CN¥6.8b - CN¥1.3b) (Based on the trailing twelve months to December 2023).

So, Zhejiang Weixing New Building Materials has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Building industry average of 6.4%.

See our latest analysis for Zhejiang Weixing New Building Materials

Above you can see how the current ROCE for Zhejiang Weixing New Building Materials compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Weixing New Building Materials .

So How Is Zhejiang Weixing New Building Materials' ROCE Trending?

We'd be pretty happy with returns on capital like Zhejiang Weixing New Building Materials. The company has employed 63% more capital in the last five years, and the returns on that capital have remained stable at 31%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line On Zhejiang Weixing New Building Materials' ROCE

Zhejiang Weixing New Building Materials has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. In light of this, the stock has only gained 29% over the last five years for shareholders who have owned the stock in this period. So to determine if Zhejiang Weixing New Building Materials is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 002372 on our platform that is definitely worth checking out.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.