Returns On Capital Signal Tricky Times Ahead For Zhe Jiang Hai Liang (SZSE:002203)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Zhe Jiang Hai Liang (SZSE:002203), we don't think it's current trends fit the mold of a multi-bagger.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Zhe Jiang Hai Liang, this is the formula:

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

0.042 = CN¥1.1b ÷ (CN¥45b - CN¥19b) (Based on the trailing twelve months to September 2024).

Thus, Zhe Jiang Hai Liang has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.8%.

See our latest analysis for Zhe Jiang Hai Liang

Above you can see how the current ROCE for Zhe Jiang Hai Liang compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhe Jiang Hai Liang .

So How Is Zhe Jiang Hai Liang's ROCE Trending?

When we looked at the ROCE trend at Zhe Jiang Hai Liang, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Zhe Jiang Hai Liang has done well to pay down its current liabilities to 42% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 42% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

In summary, we're somewhat concerned by Zhe Jiang Hai Liang's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 13% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with Zhe Jiang Hai Liang (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

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.