Zhidao International (Holdings) (HKG:1220) Is Looking To Continue Growing Its Returns On Capital

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Zhidao International (Holdings) (HKG:1220) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Zhidao International (Holdings):

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

0.004 = HK$1.1m ÷ (HK$409m - HK$122m) (Based on the trailing twelve months to March 2023).

Thus, Zhidao International (Holdings) has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.5%.

See our latest analysis for Zhidao International (Holdings)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhidao International (Holdings)'s ROCE against it's prior returns. If you're interested in investigating Zhidao International (Holdings)'s past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

It's great to see that Zhidao International (Holdings) has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 37%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 30% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Zhidao International (Holdings)'s ROCE

In the end, Zhidao International (Holdings) has proven it's capital allocation skills are good with those higher returns from less amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 94% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

Zhidao International (Holdings) does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are significant...

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.