Shandong Zhangqiu Blower's (SZSE:002598) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Shandong Zhangqiu Blower (SZSE:002598) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Shandong Zhangqiu Blower, this is the formula:

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

0.075 = CN¥115m ÷ (CN¥2.8b - CN¥1.3b) (Based on the trailing twelve months to June 2024).

So, Shandong Zhangqiu Blower has an ROCE of 7.5%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.5%.

Check out our latest analysis for Shandong Zhangqiu Blower

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Zhangqiu Blower's ROCE against it's prior returns. If you'd like to look at how Shandong Zhangqiu Blower has performed in the past in other metrics, you can view this free graph of Shandong Zhangqiu Blower's past earnings, revenue and cash flow.

So How Is Shandong Zhangqiu Blower's ROCE Trending?

In terms of Shandong Zhangqiu Blower's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. However it looks like Shandong Zhangqiu Blower might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Shandong Zhangqiu Blower has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Shandong Zhangqiu Blower's ROCE

Bringing it all together, while we're somewhat encouraged by Shandong Zhangqiu Blower's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 40% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Shandong Zhangqiu Blower, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Shandong Zhangqiu Blower 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.