There Are Reasons To Feel Uneasy About Zhou Hei Ya International Holdings' (HKG:1458) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Zhou Hei Ya International Holdings (HKG:1458), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for Zhou Hei Ya International Holdings:

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).

Thus, Zhou Hei Ya International Holdings has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.9%.

See our latest analysis for Zhou Hei Ya International Holdings

In the above chart we have measured Zhou Hei Ya International Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

When we looked at the ROCE trend at Zhou Hei Ya International Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.1% from 24% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On 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 investors appear hesitant that the trends will pick up because the stock has fallen 38% in the last five years. Therefore based on the analysis done in this article, we don't think Zhou Hei Ya International Holdings has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for Zhou Hei Ya International Holdings that we think you should be aware of.

While Zhou Hei Ya 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.