Stock Analysis

Slowing Rates Of Return At Zhejiang Shibao (HKG:1057) Leave Little Room For Excitement

SEHK:1057
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Did you know there are some financial metrics that can provide clues of a potential 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 Shibao (HKG:1057), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Zhejiang Shibao is:

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

0.029 = CN¥41m ÷ (CN¥2.0b - CN¥559m) (Based on the trailing twelve months to March 2021).

So, Zhejiang Shibao has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 8.4%.

Check out our latest analysis for Zhejiang Shibao

roce
SEHK:1057 Return on Capital Employed July 28th 2021

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 want to delve into the historical earnings, revenue and cash flow of Zhejiang Shibao, check out these free graphs here.

The Trend Of ROCE

Things have been pretty stable at Zhejiang Shibao, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're 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.

The Bottom Line On Zhejiang Shibao's ROCE

In a nutshell, Zhejiang Shibao has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 50% 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.

On a final note, we found 3 warning signs for Zhejiang Shibao (1 is a bit unpleasant) you should be aware of.

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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Valuation is complex, but we're here to simplify it.

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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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