Zhixin Group Holding (HKG:2187) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Zhixin Group Holding (HKG:2187), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Zhixin Group Holding is:

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

0.058 = CN¥33m ÷ (CN¥1.2b - CN¥685m) (Based on the trailing twelve months to June 2022).

Thus, Zhixin Group Holding has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 7.5%.

See our latest analysis for Zhixin Group Holding

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhixin Group Holding's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Zhixin Group Holding's ROCE Trend?

When we looked at the ROCE trend at Zhixin Group Holding, we didn't gain much confidence. Around four years ago the returns on capital were 32%, but since then they've fallen to 5.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

On a related note, Zhixin Group Holding has decreased its current liabilities to 55% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Zhixin Group Holding's ROCE

To conclude, we've found that Zhixin Group Holding is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 58% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhixin Group Holding (of which 1 makes us a bit uncomfortable!) that you should know about.

While Zhixin Group Holding 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.