Returns On Capital Signal Tricky Times Ahead For Zhejiang Taihua New Material Group (SHSE:603055)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Zhejiang Taihua New Material Group (SHSE:603055), we don't think it's current trends fit the mold of a multi-bagger.

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 Zhejiang Taihua New Material Group:

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

0.072 = CN¥505m ÷ (CN¥11b - CN¥4.0b) (Based on the trailing twelve months to March 2024).

Therefore, Zhejiang Taihua New Material Group has an ROCE of 7.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.5%.

View our latest analysis for Zhejiang Taihua New Material Group

Above you can see how the current ROCE for Zhejiang Taihua New Material Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Taihua New Material Group .

What Can We Tell From Zhejiang Taihua New Material Group's ROCE Trend?

In terms of Zhejiang Taihua New Material Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.2% from 12% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

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 Taihua New Material Group. Furthermore the stock has climbed 55% 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.

Zhejiang Taihua New Material Group does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are concerning...

While Zhejiang Taihua New Material 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.

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