Zhejiang Cfmoto PowerLtd (SHSE:603129) Shareholders Will Want The ROCE Trajectory To Continue

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Zhejiang Cfmoto PowerLtd (SHSE:603129) looks quite promising in regards to its trends of return on capital.

What Is 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. The formula for this calculation on Zhejiang Cfmoto PowerLtd is:

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

0.18 = CN¥1.0b ÷ (CN¥11b - CN¥5.0b) (Based on the trailing twelve months to March 2024).

Therefore, Zhejiang Cfmoto PowerLtd has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 5.7% generated by the Leisure industry.

See our latest analysis for Zhejiang Cfmoto PowerLtd

In the above chart we have measured Zhejiang Cfmoto PowerLtd'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 Cfmoto PowerLtd .

What Can We Tell From Zhejiang Cfmoto PowerLtd's ROCE Trend?

The trends we've noticed at Zhejiang Cfmoto PowerLtd are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 455% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, Zhejiang Cfmoto PowerLtd has a high ratio of current liabilities to total assets of 46%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Zhejiang Cfmoto PowerLtd's ROCE

All in all, it's terrific to see that Zhejiang Cfmoto PowerLtd is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 675% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 2 warning signs for Zhejiang Cfmoto PowerLtd (1 can't be ignored) 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.