Zhejiang Tiantie Industry (SZSE:300587) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Zhejiang Tiantie Industry (SZSE:300587) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Zhejiang Tiantie Industry, this is the formula:

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

0.016 = CN¥64m ÷ (CN¥5.8b - CN¥1.8b) (Based on the trailing twelve months to September 2023).

Therefore, Zhejiang Tiantie Industry has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.0%.

View our latest analysis for Zhejiang Tiantie Industry

Above you can see how the current ROCE for Zhejiang Tiantie Industry compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Tiantie Industry .

How Are Returns Trending?

On the surface, the trend of ROCE at Zhejiang Tiantie Industry doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.6% from 9.0% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 32%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.6%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Zhejiang Tiantie Industry's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Tiantie Industry is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 52% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Zhejiang Tiantie Industry does have some risks, we noticed 3 warning signs (and 2 which can't be ignored) we think you should know about.

While Zhejiang Tiantie Industry 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.