Returns On Capital At Zhejiang Fulai New MaterialLtd (SHSE:605488) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Zhejiang Fulai New MaterialLtd (SHSE:605488) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Zhejiang Fulai New MaterialLtd is:

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

0.033 = CN¥65m ÷ (CN¥3.3b - CN¥1.3b) (Based on the trailing twelve months to June 2024).

So, Zhejiang Fulai New MaterialLtd has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.5%.

See our latest analysis for Zhejiang Fulai New MaterialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Fulai New MaterialLtd's ROCE against it's prior returns. If you'd like to look at how Zhejiang Fulai New MaterialLtd has performed in the past in other metrics, you can view this free graph of Zhejiang Fulai New MaterialLtd's past earnings, revenue and cash flow.

So How Is Zhejiang Fulai New MaterialLtd's ROCE Trending?

When we looked at the ROCE trend at Zhejiang Fulai New MaterialLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.3% from 30% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Zhejiang Fulai New MaterialLtd has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Fulai New MaterialLtd 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 12% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Zhejiang Fulai New MaterialLtd does have some risks, we noticed 5 warning signs (and 3 which are significant) we think you should know about.

While Zhejiang Fulai New MaterialLtd 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.