Some Investors May Be Worried About Zhejiang Century Huatong GroupLtd's (SZSE:002602) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Zhejiang Century Huatong GroupLtd (SZSE:002602) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for Zhejiang Century Huatong GroupLtd, this is the formula:

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

0.042 = CN¥1.3b ÷ (CN¥36b - CN¥5.1b) (Based on the trailing twelve months to September 2023).

So, Zhejiang Century Huatong GroupLtd has an ROCE of 4.2%. Even though it's in line with the industry average of 4.4%, it's still a low return by itself.

View our latest analysis for Zhejiang Century Huatong GroupLtd

Above you can see how the current ROCE for Zhejiang Century Huatong GroupLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Century Huatong GroupLtd .

The Trend Of ROCE

In terms of Zhejiang Century Huatong GroupLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 16%, but since then they've fallen to 4.2%. However it looks like Zhejiang Century Huatong GroupLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Zhejiang Century Huatong GroupLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 50% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Zhejiang Century Huatong GroupLtd has the makings of a multi-bagger.

While Zhejiang Century Huatong GroupLtd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 002602 on our platform.

While Zhejiang Century Huatong GroupLtd 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.