Returns On Capital Are Showing Encouraging Signs At Henan Zhongfu IndustrialLtd (SHSE:600595)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Henan Zhongfu IndustrialLtd (SHSE:600595) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Henan Zhongfu IndustrialLtd, this is the formula:

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

0.085 = CN¥1.6b ÷ (CN¥23b - CN¥4.9b) (Based on the trailing twelve months to March 2024).

Thus, Henan Zhongfu IndustrialLtd has an ROCE of 8.5%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 6.7%.

View our latest analysis for Henan Zhongfu IndustrialLtd

In the above chart we have measured Henan Zhongfu IndustrialLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Henan Zhongfu IndustrialLtd .

The Trend Of ROCE

We're delighted to see that Henan Zhongfu IndustrialLtd is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.5% on its capital. Not only that, but the company is utilizing 216% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 21%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Henan Zhongfu IndustrialLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

Long story short, we're delighted to see that Henan Zhongfu IndustrialLtd's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 80% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Henan Zhongfu IndustrialLtd looks impressive, no company is worth an infinite price. The intrinsic value infographic for 600595 helps visualize whether it is currently trading for a fair price.

While Henan Zhongfu IndustrialLtd 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.