Some Investors May Be Worried About Zhejiang Great Shengda PackagingLtd's (SHSE:603687) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Zhejiang Great Shengda PackagingLtd (SHSE:603687) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhejiang Great Shengda PackagingLtd:

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

0.037 = CN¥136m ÷ (CN¥4.4b - CN¥732m) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang Great Shengda PackagingLtd has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Packaging industry average of 5.3%.

See our latest analysis for Zhejiang Great Shengda PackagingLtd

In the above chart we have measured Zhejiang Great Shengda PackagingLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Great Shengda PackagingLtd .

How Are Returns Trending?

When we looked at the ROCE trend at Zhejiang Great Shengda PackagingLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.7% from 7.6% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Zhejiang Great Shengda PackagingLtd's ROCE

In summary, Zhejiang Great Shengda PackagingLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 41% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 1 warning sign with Zhejiang Great Shengda PackagingLtd and understanding it should be part of your investment process.

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.

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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.