The Returns On Capital At Zhou Hei Ya International Holdings (HKG:1458) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Zhou Hei Ya International Holdings (HKG:1458) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. The formula for this calculation on Zhou Hei Ya International Holdings is:

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

0.011 = CN¥59m ÷ (CN¥6.6b - CN¥1.0b) (Based on the trailing twelve months to June 2022).

So, Zhou Hei Ya International Holdings has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Food industry average of 9.1%.

Check out our latest analysis for Zhou Hei Ya International Holdings

Above you can see how the current ROCE for Zhou Hei Ya International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

On the surface, the trend of ROCE at Zhou Hei Ya International Holdings doesn't inspire confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 1.1%. However it looks like Zhou Hei Ya International Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Zhou Hei Ya International Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Zhou Hei Ya International Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 37% 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.

Zhou Hei Ya International Holdings does have some risks though, and we've spotted 1 warning sign for Zhou Hei Ya International Holdings that you might be interested in.

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.