Some Investors May Be Worried About Zhejiang Dongri Limited's (SHSE:600113) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Zhejiang Dongri Limited (SHSE:600113), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Zhejiang Dongri Limited is:

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

0.069 = CN¥194m ÷ (CN¥3.7b - CN¥930m) (Based on the trailing twelve months to December 2023).

Thus, Zhejiang Dongri Limited has an ROCE of 6.9%. Even though it's in line with the industry average of 6.9%, it's still a low return by itself.

See our latest analysis for Zhejiang Dongri Limited

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Dongri Limited's ROCE against it's prior returns. If you're interested in investigating Zhejiang Dongri Limited's past further, check out this free graph covering Zhejiang Dongri Limited's past earnings, revenue and cash flow.

What Does the ROCE Trend For Zhejiang Dongri Limited Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 16% five years ago, while capital employed has grown 229%. That being said, Zhejiang Dongri Limited raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Zhejiang Dongri Limited might not have received a full period of earnings contribution from it.

The Bottom Line On Zhejiang Dongri Limited's ROCE

Bringing it all together, while we're somewhat encouraged by Zhejiang Dongri Limited's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 15% over the last five years, 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.

Like most companies, Zhejiang Dongri Limited does come with some risks, and we've found 2 warning signs that you should be aware of.

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.