Be Wary Of Zhejiang Natural Outdoor Goods (SHSE:605080) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Zhejiang Natural Outdoor Goods (SHSE:605080), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhejiang Natural Outdoor Goods:

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

0.085 = CN¥171m ÷ (CN¥2.3b - CN¥328m) (Based on the trailing twelve months to June 2024).

Thus, Zhejiang Natural Outdoor Goods has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Leisure industry average of 6.7%.

Check out our latest analysis for Zhejiang Natural Outdoor Goods

Above you can see how the current ROCE for Zhejiang Natural Outdoor Goods compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Natural Outdoor Goods for free.

How Are Returns Trending?

In terms of Zhejiang Natural Outdoor Goods' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 26%, but since then they've fallen to 8.5%. However it looks like Zhejiang Natural Outdoor Goods might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Zhejiang Natural Outdoor Goods has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, Zhejiang Natural Outdoor Goods is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last three years, the stock has given away 63% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Zhejiang Natural Outdoor Goods has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Zhejiang Natural Outdoor Goods that you might find interesting.

While Zhejiang Natural Outdoor Goods may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.