Zhejiang YunzhongmaLtd (SHSE:603130) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Zhejiang YunzhongmaLtd (SHSE:603130) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Zhejiang YunzhongmaLtd is:

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

0.084 = CN¥117m ÷ (CN¥2.6b - CN¥1.3b) (Based on the trailing twelve months to June 2024).

Therefore, Zhejiang YunzhongmaLtd has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Luxury industry average of 6.1%.

Check out our latest analysis for Zhejiang YunzhongmaLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang YunzhongmaLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang YunzhongmaLtd.

So How Is Zhejiang YunzhongmaLtd's ROCE Trending?

In terms of Zhejiang YunzhongmaLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.4% from 38% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Zhejiang YunzhongmaLtd has decreased its current liabilities to 47% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 47% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Zhejiang YunzhongmaLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang YunzhongmaLtd is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last year have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhejiang YunzhongmaLtd (of which 1 can't be ignored!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.