Zhejiang Chinastars New Materials Group (SZSE:301077) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Zhejiang Chinastars New Materials Group (SZSE:301077), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Chinastars New Materials Group:

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

0.06 = CN¥73m ÷ (CN¥2.1b - CN¥844m) (Based on the trailing twelve months to September 2023).

Thus, Zhejiang Chinastars New Materials Group has an ROCE of 6.0%. In absolute terms, that's a low return, but it's much better than the Luxury industry average of 5.0%.

See our latest analysis for Zhejiang Chinastars New Materials Group

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 Chinastars New Materials Group's past further, check out this free graph covering Zhejiang Chinastars New Materials Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Zhejiang Chinastars New Materials Group Tell Us?

When we looked at the ROCE trend at Zhejiang Chinastars New Materials Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 31% over the last five years. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Zhejiang Chinastars New Materials Group has done well to pay down its current liabilities to 41% 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

In Conclusion...

To conclude, we've found that Zhejiang Chinastars New Materials Group is reinvesting in the business, but returns have been falling. Since the stock has declined 38% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Zhejiang Chinastars New Materials Group does have some risks though, and we've spotted 1 warning sign for Zhejiang Chinastars New Materials Group that you might be interested in.

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.

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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.