Zhejiang Shengyang Science and TechnologyLtd (SHSE:603703) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Zhejiang Shengyang Science and TechnologyLtd's (SHSE:603703) returns on capital, so let's have a look.

Understanding 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. 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)

0.0018 = CN¥1.7m ÷ (CN¥2.0b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang Shengyang Science and TechnologyLtd has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 4.1%.

Check out our latest analysis for Zhejiang Shengyang Science and TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Shengyang Science and TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Shengyang Science and TechnologyLtd.

What Does the ROCE Trend For Zhejiang Shengyang Science and TechnologyLtd Tell Us?

The fact that Zhejiang Shengyang Science and TechnologyLtd is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 0.2% which is a sight for sore eyes. Not only that, but the company is utilizing 59% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, Zhejiang Shengyang Science and TechnologyLtd's current liabilities are still rather high at 54% 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.

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. Since the stock has only returned 12% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhejiang Shengyang Science and TechnologyLtd (of which 1 doesn't sit too well with us!) that you should know about.

While Zhejiang Shengyang Science and TechnologyLtd 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.