Zhejiang Natural Outdoor Goods (SHSE:605080) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Zhejiang Natural Outdoor Goods (SHSE:605080), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Zhejiang Natural Outdoor Goods, this is the formula:

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

0.086 = CN¥176m ÷ (CN¥2.4b - CN¥359m) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang Natural Outdoor Goods has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 5.3% generated by the Leisure industry, it's much better.

Check out our latest analysis for Zhejiang Natural Outdoor Goods

In the above chart we have measured Zhejiang Natural Outdoor Goods' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Natural Outdoor Goods .

So How Is Zhejiang Natural Outdoor Goods' ROCE Trending?

On the surface, the trend of ROCE at Zhejiang Natural Outdoor Goods doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 8.6%. 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 side note, Zhejiang Natural Outdoor Goods has done well to pay down its current liabilities to 15% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Bottom Line On Zhejiang Natural Outdoor Goods' ROCE

While returns have fallen for Zhejiang Natural Outdoor Goods in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 35% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

While Zhejiang Natural Outdoor Goods doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 605080 on our platform.

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.