Investors Will Want Ningbo Zhongbai's (SHSE:600857) Growth In ROCE To Persist

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Ningbo Zhongbai (SHSE:600857) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Ningbo Zhongbai, this is the formula:

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

0.16 = CN¥137m ÷ (CN¥976m - CN¥97m) (Based on the trailing twelve months to March 2024).

So, Ningbo Zhongbai has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 4.6% generated by the Multiline Retail industry.

View our latest analysis for Ningbo Zhongbai

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 Ningbo Zhongbai has performed in the past in other metrics, you can view this free graph of Ningbo Zhongbai's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Ningbo Zhongbai has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 559% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 32% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Ningbo Zhongbai may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line On Ningbo Zhongbai's ROCE

In the end, Ningbo Zhongbai has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 36% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 3 warning signs for Ningbo Zhongbai you'll probably want to know about.

While Ningbo Zhongbai 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.