The Returns On Capital At Zhe Jiang Dayang Biotech Group (SZSE:003017) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Dayang Biotech Group (SZSE:003017), 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. The formula for this calculation on Zhe Jiang Dayang Biotech Group is:

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

0.046 = CN¥52m ÷ (CN¥1.5b - CN¥345m) (Based on the trailing twelve months to March 2024).

Thus, Zhe Jiang Dayang Biotech Group has an ROCE of 4.6%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

See our latest analysis for Zhe Jiang Dayang Biotech Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhe Jiang Dayang Biotech Group's past further, check out this free graph covering Zhe Jiang Dayang Biotech Group's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Zhe Jiang Dayang Biotech Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.6% from 16% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

In Conclusion...

In summary, we're somewhat concerned by Zhe Jiang Dayang Biotech Group's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 31% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Zhe Jiang Dayang Biotech Group, we've spotted 5 warning signs, and 1 of them makes us a bit uncomfortable.

While Zhe Jiang Dayang Biotech Group 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.