The Return Trends At Zhejiang Shengyang Science and TechnologyLtd (SHSE:603703) Look Promising

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Zhejiang Shengyang Science and TechnologyLtd (SHSE:603703) and its trend of ROCE, we really liked what we saw.

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

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. Analysts use this formula to calculate it for Zhejiang Shengyang Science and TechnologyLtd:

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

0.011 = CN¥11m ÷ (CN¥1.9b - CN¥783m) (Based on the trailing twelve months to September 2023).

Therefore, Zhejiang Shengyang Science and TechnologyLtd has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 5.1%.

Check out our latest analysis for Zhejiang Shengyang Science and TechnologyLtd

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're interested in investigating Zhejiang Shengyang Science and TechnologyLtd's past further, check out this free graph covering Zhejiang Shengyang Science and TechnologyLtd's past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Shengyang Science and TechnologyLtd's ROCE Trend?

We're delighted to see that Zhejiang Shengyang Science and TechnologyLtd is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 1.1% which is a sight for sore eyes. Not only that, but the company is utilizing 105% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Another thing to note, Zhejiang Shengyang Science and TechnologyLtd has a high ratio of current liabilities to total assets of 42%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's great to see that Zhejiang Shengyang Science and TechnologyLtd has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 42% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 2 warning signs with Zhejiang Shengyang Science and TechnologyLtd and understanding them should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.