Zhongfu Shenying Carbon FiberLtd's (SHSE:688295) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Speaking of which, we noticed some great changes in Zhongfu Shenying Carbon FiberLtd's (SHSE:688295) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Zhongfu Shenying Carbon FiberLtd:

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

0.015 = CN¥114m ÷ (CN¥9.8b - CN¥2.0b) (Based on the trailing twelve months to March 2024).

Thus, Zhongfu Shenying Carbon FiberLtd has an ROCE of 1.5%. 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 Zhongfu Shenying Carbon FiberLtd

In the above chart we have measured Zhongfu Shenying Carbon FiberLtd'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 Zhongfu Shenying Carbon FiberLtd .

The Trend Of ROCE

We're delighted to see that Zhongfu Shenying Carbon FiberLtd is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 1.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Zhongfu Shenying Carbon FiberLtd is utilizing 1,181% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 20%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Zhongfu Shenying Carbon FiberLtd's ROCE

Long story short, we're delighted to see that Zhongfu Shenying Carbon FiberLtd's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 49% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhongfu Shenying Carbon FiberLtd (of which 1 makes us a bit uncomfortable!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.