Returns On Capital At ZheJiang HuaSheng TechnologyLtd (SHSE:605180) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at ZheJiang HuaSheng TechnologyLtd (SHSE:605180) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for ZheJiang HuaSheng TechnologyLtd:

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

0.013 = CN¥15m ÷ (CN¥1.1b - CN¥25m) (Based on the trailing twelve months to March 2024).

Therefore, ZheJiang HuaSheng TechnologyLtd has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

View our latest analysis for ZheJiang HuaSheng TechnologyLtd

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

What Does the ROCE Trend For ZheJiang HuaSheng TechnologyLtd Tell Us?

When we looked at the ROCE trend at ZheJiang HuaSheng TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.3% from 23% 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 HuaSheng TechnologyLtd's ROCE

To conclude, we've found that ZheJiang HuaSheng TechnologyLtd is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 44% 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 final note, you should learn about the 4 warning signs we've spotted with ZheJiang HuaSheng TechnologyLtd (including 3 which shouldn't be ignored) .

While ZheJiang HuaSheng 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.