Zhejiang Weiming Environment Protection (SHSE:603568) Is Reinvesting At Lower Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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¥3.1b ÷ (CN¥27b - CN¥3.7b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Weiming Environment Protection has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 5.3% it's much better.

View 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 Does the ROCE Trend For Zhejiang Weiming Environment Protection Tell Us?

In terms of Zhejiang Weiming Environment Protection's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 19%, 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

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Weiming Environment Protection is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 69% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, Zhejiang Weiming Environment Protection does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.