Some Investors May Be Worried About Changzheng Engineering TechnologyLtd's (SHSE:603698) 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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Changzheng Engineering TechnologyLtd (SHSE:603698), it didn't seem to tick all of these boxes.

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 Changzheng Engineering TechnologyLtd, this is the formula:

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

0.031 = CN¥106m ÷ (CN¥5.4b - CN¥2.0b) (Based on the trailing twelve months to March 2024).

Thus, Changzheng Engineering TechnologyLtd has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 6.4%.

Check out our latest analysis for Changzheng Engineering TechnologyLtd

In the above chart we have measured Changzheng Engineering TechnologyLtd's 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 Changzheng Engineering TechnologyLtd .

So How Is Changzheng Engineering TechnologyLtd's ROCE Trending?

In terms of Changzheng Engineering TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.1% from 7.3% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Changzheng Engineering TechnologyLtd is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 5.9% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Changzheng Engineering TechnologyLtd, we've discovered 2 warning signs that you should be aware of.

While Changzheng Engineering TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.