Zhong Fu Tong Group (SZSE:300560) Will Want To Turn Around Its Return Trends

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Zhong Fu Tong Group (SZSE:300560) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Zhong Fu Tong Group is:

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

0.033 = CN¥44m ÷ (CN¥2.8b - CN¥1.5b) (Based on the trailing twelve months to September 2023).

Thus, Zhong Fu Tong Group has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 12%.

Check out our latest analysis for Zhong Fu Tong Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhong Fu Tong Group's ROCE against it's prior returns. If you'd like to look at how Zhong Fu Tong Group has performed in the past in other metrics, you can view this free graph of Zhong Fu Tong Group's past earnings, revenue and cash flow.

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 9.6% five years ago, while capital employed has grown 156%. Usually this isn't ideal, but given Zhong Fu Tong Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Zhong Fu Tong Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Zhong Fu Tong Group's current liabilities have increased over the last five years to 53% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Zhong Fu Tong Group is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 19% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 4 warning signs for Zhong Fu Tong Group (2 are significant) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.