Here's What's Concerning About Zhejiang Huilong New MaterialsLtd's (SZSE:301057) Returns On Capital

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. However, after investigating Zhejiang Huilong New MaterialsLtd (SZSE:301057), 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. The formula for this calculation on Zhejiang Huilong New MaterialsLtd is:

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

0.056 = CN¥43m ÷ (CN¥890m - CN¥123m) (Based on the trailing twelve months to September 2023).

Thus, Zhejiang Huilong New MaterialsLtd has an ROCE of 5.6%. On its own, that's a low figure but it's around the 5.0% average generated by the Luxury industry.

See our latest analysis for Zhejiang Huilong New MaterialsLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhejiang Huilong New MaterialsLtd's past further, check out this free graph covering Zhejiang Huilong New MaterialsLtd's past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Huilong New MaterialsLtd's ROCE Trend?

When we looked at the ROCE trend at Zhejiang Huilong New MaterialsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.6% from 28% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Zhejiang Huilong New MaterialsLtd has done well to pay down its current liabilities to 14% 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.

The Bottom Line On Zhejiang Huilong New MaterialsLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhejiang Huilong New MaterialsLtd. And there could be an opportunity here if other metrics look good too, because the stock has declined 45% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Zhejiang Huilong New MaterialsLtd does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are potentially serious...

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.