Zhongzheng International's (HKG:943) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 when we looked at Zhongzheng International (HKG:943) and its trend of ROCE, we really liked what we saw.

What Is 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. To calculate this metric for Zhongzheng International, this is the formula:

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

0.13 = HK$139m ÷ (HK$3.0b - HK$2.0b) (Based on the trailing twelve months to June 2023).

Therefore, Zhongzheng International has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Personal Products industry.

View our latest analysis for Zhongzheng International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhongzheng International's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Zhongzheng International, check out these free graphs here.

What Does the ROCE Trend For Zhongzheng International Tell Us?

It's great to see that Zhongzheng International 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. In regards to capital employed, Zhongzheng International is using 21% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 66% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In summary, it's great to see that Zhongzheng International has been able to turn things around and earn higher returns on lower amounts of capital. Although the company may be facing some issues elsewhere since the stock has plunged 90% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

If you'd like to know more about Zhongzheng International, we've spotted 4 warning signs, and 1 of them can't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.