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

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Zhixin Group Holding (HKG:2187), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Zhixin Group Holding is:

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

0.013 = CN¥8.4m ÷ (CN¥1.3b - CN¥642m) (Based on the trailing twelve months to June 2024).

So, Zhixin Group Holding has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 2.4%.

See our latest analysis for Zhixin Group Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhixin Group Holding's ROCE against it's prior returns. If you're interested in investigating Zhixin Group Holding's past further, check out this free graph covering Zhixin Group Holding's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Zhixin Group Holding, we didn't gain much confidence. To be more specific, ROCE has fallen from 42% over the last five years. 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, Zhixin Group Holding has decreased its current liabilities to 51% of total assets. That could partly explain why the ROCE has dropped. 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.

In Conclusion...

To conclude, we've found that Zhixin Group Holding is reinvesting in the business, but returns have been falling. Since the stock has declined 57% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Zhixin Group Holding we've found 6 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

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.