Zhejiang Tuna Environmental Science & TechnologyCo.Ltd (SHSE:603177) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after briefly looking over the numbers, we don't think Zhejiang Tuna Environmental Science & TechnologyCo.Ltd (SHSE:603177) 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?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Zhejiang Tuna Environmental Science & TechnologyCo.Ltd is:

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

0.0046 = CN¥3.4m ÷ (CN¥1.8b - CN¥1.0b) (Based on the trailing twelve months to June 2024).

Thus, Zhejiang Tuna Environmental Science & TechnologyCo.Ltd has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 5.6%.

View 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 Can We Tell From Zhejiang Tuna Environmental Science & TechnologyCo.Ltd's ROCE Trend?

When we looked at the ROCE trend at Zhejiang Tuna Environmental Science & TechnologyCo.Ltd, we didn't gain much confidence. Around five years ago the returns on capital were 2.3%, but since then they've fallen to 0.5%. 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.

On a side note, Zhejiang Tuna Environmental Science & TechnologyCo.Ltd's current liabilities are still rather high at 58% of total assets. 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.

The Bottom Line On Zhejiang Tuna Environmental Science & TechnologyCo.Ltd's ROCE

We're a bit apprehensive about Zhejiang Tuna Environmental Science & TechnologyCo.Ltd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 15% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

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.