Zhidao International (Holdings)'s (HKG:1220) Returns On Capital Are Heading Higher

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. So when we looked at Zhidao International (Holdings) (HKG:1220) and its trend of ROCE, we really liked what we saw.

What Is 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. The formula for this calculation on Zhidao International (Holdings) is:

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

0.047 = HK$14m ÷ (HK$535m - HK$238m) (Based on the trailing twelve months to September 2023).

Thus, Zhidao International (Holdings) has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.8%.

Check out 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'd like to look at how Zhidao International (Holdings) has performed in the past in other metrics, you can view this free graph of Zhidao International (Holdings)'s past earnings, revenue and cash flow.

The Trend Of ROCE

While the ROCE is still rather low for Zhidao International (Holdings), we're glad to see it heading in the right direction. The figures show that over the last five years, returns on capital have grown by 352%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Zhidao International (Holdings) appears to been achieving more with less, since the business is using 37% less capital to run its operation. Zhidao International (Holdings) may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 44% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Zhidao International (Holdings)'s ROCE

From what we've seen above, Zhidao International (Holdings) has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 50% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Zhidao International (Holdings) does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Zhidao International (Holdings) 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. 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.