Returns On Capital Are Showing Encouraging Signs At Zhejiang Qianjiang Biochemical (SHSE:600796)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. With that in mind, we've noticed some promising trends at Zhejiang Qianjiang Biochemical (SHSE:600796) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Zhejiang Qianjiang Biochemical, this is the formula:

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

0.043 = CN¥245m ÷ (CN¥7.5b - CN¥1.8b) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang Qianjiang Biochemical has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.4%.

Check out our latest analysis for Zhejiang Qianjiang Biochemical

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Qianjiang Biochemical.

What Can We Tell From Zhejiang Qianjiang Biochemical's ROCE Trend?

The fact that Zhejiang Qianjiang Biochemical is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 4.3% on its capital. Not only that, but the company is utilizing 704% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Zhejiang Qianjiang Biochemical's ROCE

Long story short, we're delighted to see that Zhejiang Qianjiang Biochemical's reinvestment activities have paid off and the company is now profitable. Since the stock has only returned 9.4% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing: We've identified 2 warning signs with Zhejiang Qianjiang Biochemical (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While Zhejiang Qianjiang Biochemical may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.