Zhefu Holding Group (SZSE:002266) May Have Issues Allocating Its 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Zhefu Holding Group (SZSE:002266) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Zhefu Holding Group:

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

0.044 = CN¥542m ÷ (CN¥25b - CN¥13b) (Based on the trailing twelve months to September 2024).

Therefore, Zhefu Holding Group has an ROCE of 4.4%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 5.3%.

Check out our latest analysis for Zhefu Holding Group

In the above chart we have measured Zhefu Holding Group'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 Zhefu Holding Group .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Zhefu Holding Group doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 51%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.4%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

In Conclusion...

To conclude, we've found that Zhefu Holding Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching Zhefu Holding Group, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Zhefu Holding Group 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.