Be Wary Of Zhejiang Weiming Environment Protection (SHSE:603568) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Zhejiang Weiming Environment Protection (SHSE:603568), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 Zhejiang Weiming Environment Protection, this is the formula:

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

0.13 = CN¥2.6b ÷ (CN¥24b - CN¥3.8b) (Based on the trailing twelve months to December 2023).

Therefore, Zhejiang Weiming Environment Protection has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Commercial Services industry.

Check out our latest analysis for Zhejiang Weiming Environment Protection

In the above chart we have measured Zhejiang Weiming Environment Protection's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Weiming Environment Protection .

What Can We Tell From Zhejiang Weiming Environment Protection's ROCE Trend?

When we looked at the ROCE trend at Zhejiang Weiming Environment Protection, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 13%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Zhejiang Weiming Environment Protection's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhejiang Weiming Environment Protection. Furthermore the stock has climbed 76% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing to note, we've identified 1 warning sign with Zhejiang Weiming Environment Protection and understanding this should be part of your investment process.

While Zhejiang Weiming Environment Protection 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.