Zhejiang Kaier New MaterialsLtd (SZSE:300234) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Zhejiang Kaier New MaterialsLtd (SZSE:300234) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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 Zhejiang Kaier New MaterialsLtd is:

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

0.057 = CN¥66m ÷ (CN¥1.4b - CN¥271m) (Based on the trailing twelve months to March 2024).

Therefore, Zhejiang Kaier New MaterialsLtd has an ROCE of 5.7%. Even though it's in line with the industry average of 6.1%, it's still a low return by itself.

View our latest analysis for Zhejiang Kaier New MaterialsLtd

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'd like to look at how Zhejiang Kaier New MaterialsLtd has performed in the past in other metrics, you can view this free graph of Zhejiang Kaier New MaterialsLtd's past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Kaier New MaterialsLtd's ROCE Trend?

The fact that Zhejiang Kaier New MaterialsLtd is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 5.7% which is a sight for sore eyes. In addition to that, Zhejiang Kaier New MaterialsLtd is employing 30% more capital than previously which is expected of a company that's trying to break into profitability. 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.

The Bottom Line On Zhejiang Kaier New MaterialsLtd's ROCE

Long story short, we're delighted to see that Zhejiang Kaier New MaterialsLtd's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 39% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Zhejiang Kaier New MaterialsLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

While Zhejiang Kaier New MaterialsLtd 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.