Returns On Capital Signal Tricky Times Ahead For Zhejiang Xinzhonggang Thermal Power (SHSE:605162)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating Zhejiang Xinzhonggang Thermal Power (SHSE:605162), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhejiang Xinzhonggang Thermal Power:

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

0.12 = CN¥193m ÷ (CN¥1.8b - CN¥140m) (Based on the trailing twelve months to June 2024).

Therefore, Zhejiang Xinzhonggang Thermal Power has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 4.8% it's much better.

Check out our latest analysis for Zhejiang Xinzhonggang Thermal Power

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

What Does the ROCE Trend For Zhejiang Xinzhonggang Thermal Power Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 36% five years ago, while capital employed has grown 204%. Usually this isn't ideal, but given Zhejiang Xinzhonggang Thermal Power conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Zhejiang Xinzhonggang Thermal Power 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 related note, Zhejiang Xinzhonggang Thermal Power has decreased its current liabilities to 8.0% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Zhejiang Xinzhonggang Thermal Power is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 43% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Zhejiang Xinzhonggang Thermal Power we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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.

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.