Some Investors May Be Worried About ZheJiang HuaSheng TechnologyLtd's (SHSE:605180) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 HuaSheng TechnologyLtd (SHSE:605180), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 HuaSheng TechnologyLtd:

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

0.024 = CN¥27m ÷ (CN¥1.2b - CN¥49m) (Based on the trailing twelve months to June 2024).

Therefore, ZheJiang HuaSheng TechnologyLtd has an ROCE of 2.4%. Ultimately, that's a low return and it 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of ZheJiang HuaSheng TechnologyLtd.

How Are Returns Trending?

On the surface, the trend of ROCE at ZheJiang HuaSheng TechnologyLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On ZheJiang HuaSheng TechnologyLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that ZheJiang HuaSheng TechnologyLtd is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 43% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 2 warning signs with ZheJiang HuaSheng TechnologyLtd and understanding them should be part of your investment process.

While ZheJiang HuaSheng TechnologyLtd 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.