Returns On Capital Are Showing Encouraging Signs At Zhejiang China Commodities City Group (SHSE:600415)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Zhejiang China Commodities City Group (SHSE:600415) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Zhejiang China Commodities City Group:

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

0.15 = CN¥3.3b ÷ (CN¥36b - CN¥15b) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang China Commodities City Group has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.0% generated by the Retail Distributors industry.

Check out our latest analysis for Zhejiang China Commodities City Group

Above you can see how the current ROCE for Zhejiang China Commodities City Group 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 China Commodities City Group .

So How Is Zhejiang China Commodities City Group's ROCE Trending?

Zhejiang China Commodities City Group is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 24%. So we're very much inspired by what we're seeing at Zhejiang China Commodities City Group thanks to its ability to profitably reinvest capital.

On a side note, Zhejiang China Commodities City Group's current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To sum it up, Zhejiang China Commodities City Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 241% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Zhejiang China Commodities City Group can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Zhejiang China Commodities City Group and understanding this should be part of your investment process.

While Zhejiang China Commodities City 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.