Zhejiang Oceanking Development (SHSE:603213) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Zhejiang Oceanking Development (SHSE:603213), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Zhejiang Oceanking Development is:

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

0.11 = CN¥309m ÷ (CN¥3.3b - CN¥600m) (Based on the trailing twelve months to September 2024).

So, Zhejiang Oceanking Development has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.4% it's much better.

See our latest analysis for Zhejiang Oceanking Development

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Oceanking Development's ROCE against it's prior returns. If you'd like to look at how Zhejiang Oceanking Development has performed in the past in other metrics, you can view this free graph of Zhejiang Oceanking Development's past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Oceanking Development's ROCE Trend?

On the surface, the trend of ROCE at Zhejiang Oceanking Development doesn't inspire confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 11%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Zhejiang Oceanking Development's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Oceanking Development is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 46% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhejiang Oceanking Development (of which 1 makes us a bit uncomfortable!) that you should know about.

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.