Here's What's Concerning About Zhejiang Great Shengda PackagingLtd's (SHSE:603687) Returns On Capital

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Zhejiang Great Shengda PackagingLtd (SHSE:603687) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Zhejiang Great Shengda PackagingLtd, this is the formula:

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

0.028 = CN¥104m ÷ (CN¥4.4b - CN¥685m) (Based on the trailing twelve months to March 2024).

Therefore, Zhejiang Great Shengda PackagingLtd has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 4.7%.

Check out our latest analysis for Zhejiang Great Shengda PackagingLtd

Above you can see how the current ROCE for Zhejiang Great Shengda PackagingLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Great Shengda PackagingLtd .

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Zhejiang Great Shengda PackagingLtd's ROCE has reduced by 69% over the last five years, while the business employed 191% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Zhejiang Great Shengda PackagingLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Zhejiang Great Shengda PackagingLtd has done well to pay down its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Zhejiang Great Shengda PackagingLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Zhejiang Great Shengda PackagingLtd's reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 70% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Zhejiang Great Shengda PackagingLtd has the makings of a multi-bagger.

If you'd like to know about the risks facing Zhejiang Great Shengda PackagingLtd, we've discovered 3 warning signs that you should be aware of.

While Zhejiang Great Shengda PackagingLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.