Here's What's Concerning About ZRP Printing Group's (SZSE:301223) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think ZRP Printing Group (SZSE:301223) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 ZRP Printing Group is:

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

0.064 = CN¥185m ÷ (CN¥3.8b - CN¥925m) (Based on the trailing twelve months to September 2023).

Therefore, ZRP Printing Group has an ROCE of 6.4%. In absolute terms, that's a low return, but it's much better than the Packaging industry average of 4.4%.

View our latest analysis for ZRP Printing Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for ZRP Printing Group's ROCE against it's prior returns. If you'd like to look at how ZRP Printing Group has performed in the past in other metrics, you can view this free graph of ZRP Printing Group's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of ZRP Printing Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 19%, but since then they've fallen to 6.4%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, ZRP Printing Group has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Bottom Line On ZRP Printing Group's ROCE

Bringing it all together, while we're somewhat encouraged by ZRP Printing Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 27% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

ZRP Printing Group does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While ZRP Printing 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.