There Are Reasons To Feel Uneasy About Zhejiang Tuna Environmental Science & TechnologyCo.Ltd's (SHSE:603177) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Zhejiang Tuna Environmental Science & TechnologyCo.Ltd (SHSE:603177), it didn't seem to tick all of these boxes.

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 Zhejiang Tuna Environmental Science & TechnologyCo.Ltd, this is the formula:

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

0.019 = CN¥15m ÷ (CN¥1.8b - CN¥1.0b) (Based on the trailing twelve months to September 2023).

Therefore, Zhejiang Tuna Environmental Science & TechnologyCo.Ltd has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.9%.

Check out our latest analysis for Zhejiang Tuna Environmental Science & TechnologyCo.Ltd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Tuna Environmental Science & TechnologyCo.Ltd.

What Does the ROCE Trend For Zhejiang Tuna Environmental Science & TechnologyCo.Ltd Tell Us?

In terms of Zhejiang Tuna Environmental Science & TechnologyCo.Ltd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.2%, but since then they've fallen to 1.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Zhejiang Tuna Environmental Science & TechnologyCo.Ltd has a current liabilities to total assets ratio of 57%, 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 Zhejiang Tuna Environmental Science & TechnologyCo.Ltd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Tuna Environmental Science & TechnologyCo.Ltd is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 26% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Zhejiang Tuna Environmental Science & TechnologyCo.Ltd does come with some risks, and we've found 1 warning sign that 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.