Returns On Capital At Zhejiang Jinghua Laser TechnologyLtd (SHSE:603607) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Jinghua Laser TechnologyLtd (SHSE:603607), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. Analysts use this formula to calculate it for Zhejiang Jinghua Laser TechnologyLtd:

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

0.094 = CN¥95m ÷ (CN¥1.3b - CN¥281m) (Based on the trailing twelve months to June 2024).

Therefore, Zhejiang Jinghua Laser TechnologyLtd has an ROCE of 9.4%. In absolute terms, that's a low return, but it's much better than the Forestry industry average of 6.1%.

See our latest analysis for Zhejiang Jinghua Laser TechnologyLtd

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

The Trend Of ROCE

In terms of Zhejiang Jinghua Laser TechnologyLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.4% for the last five years, and the capital employed within the business has risen 30% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

In conclusion, Zhejiang Jinghua Laser TechnologyLtd has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 16% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 3 warning signs we've spotted with Zhejiang Jinghua Laser TechnologyLtd (including 1 which makes us a bit uncomfortable) .

While Zhejiang Jinghua Laser TechnologyLtd 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.