Some Investors May Be Worried About Zhang Xiaoquan's (SZSE:301055) 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? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Zhang Xiaoquan (SZSE:301055) 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 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 Zhang Xiaoquan:

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

0.045 = CN¥30m ÷ (CN¥969m - CN¥302m) (Based on the trailing twelve months to March 2024).

So, Zhang Xiaoquan has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.4%.

See our latest analysis for Zhang Xiaoquan

Above you can see how the current ROCE for Zhang Xiaoquan 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 Zhang Xiaoquan .

What Does the ROCE Trend For Zhang Xiaoquan Tell Us?

On the surface, the trend of ROCE at Zhang Xiaoquan doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.5% from 18% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Zhang Xiaoquan's ROCE

To conclude, we've found that Zhang Xiaoquan is reinvesting in the business, but returns have been falling. Since the stock has declined 23% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching Zhang Xiaoquan, you might be interested to know about the 4 warning signs that our analysis has discovered.

While Zhang Xiaoquan 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.