Return Trends At Zhejiang Shibao (HKG:1057) Aren't Appealing

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Zhejiang Shibao (HKG:1057) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Zhejiang Shibao, this is the formula:

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

0.037 = CN¥52m ÷ (CN¥2.0b - CN¥590m) (Based on the trailing twelve months to December 2020).

Thus, Zhejiang Shibao has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 10%.

See our latest analysis for Zhejiang Shibao

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

The Trend Of ROCE

Over the past five years, Zhejiang Shibao's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Zhejiang Shibao doesn't end up being a multi-bagger in a few years time.

In Conclusion...

In summary, Zhejiang Shibao isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 56% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Zhejiang Shibao we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Zhejiang Shibao isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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