Zhe Kuang Heavy IndustryLtd (SZSE:300837) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at Zhe Kuang Heavy IndustryLtd (SZSE:300837), it didn't seem to tick all of these boxes.

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. To calculate this metric for Zhe Kuang Heavy IndustryLtd, this is the formula:

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

0.052 = CN¥92m ÷ (CN¥2.3b - CN¥506m) (Based on the trailing twelve months to June 2024).

So, Zhe Kuang Heavy IndustryLtd has an ROCE of 5.2%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

Check out our latest analysis for Zhe Kuang Heavy IndustryLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhe Kuang Heavy IndustryLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhe Kuang Heavy IndustryLtd.

What Does the ROCE Trend For Zhe Kuang Heavy IndustryLtd Tell Us?

When we looked at the ROCE trend at Zhe Kuang Heavy IndustryLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.2% from 24% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

In summary, we're somewhat concerned by Zhe Kuang Heavy IndustryLtd's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 53% from where it was three years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for Zhe Kuang Heavy IndustryLtd that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.