Zhe Jiang KangshengLtd (SZSE:002418) Is Doing The Right Things To Multiply Its Share Price

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at Zhe Jiang KangshengLtd (SZSE:002418) and its trend of ROCE, we really liked what we saw.

What Is 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. To calculate this metric for Zhe Jiang KangshengLtd, this is the formula:

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

0.058 = CN¥99m ÷ (CN¥2.6b - CN¥848m) (Based on the trailing twelve months to September 2023).

Therefore, Zhe Jiang KangshengLtd has an ROCE of 5.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.

Check out our latest analysis for Zhe Jiang KangshengLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhe Jiang KangshengLtd'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 Zhe Jiang KangshengLtd.

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at Zhe Jiang KangshengLtd. We found that the returns on capital employed over the last five years have risen by 301%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 33% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Zhe Jiang KangshengLtd may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a related note, the company's ratio of current liabilities to total assets has decreased to 33%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Zhe Jiang KangshengLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

In a nutshell, we're pleased to see that Zhe Jiang KangshengLtd has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 45% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for 002418 that compares the share price and estimated value.

While Zhe Jiang KangshengLtd 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.