The Return Trends At Zhejiang Chang'an Renheng Technology (HKG:8139) Look Promising

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Zhejiang Chang'an Renheng Technology (HKG:8139) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Zhejiang Chang'an Renheng Technology:

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

0.076 = CN¥8.7m ÷ (CN¥279m - CN¥164m) (Based on the trailing twelve months to June 2022).

Thus, Zhejiang Chang'an Renheng Technology has an ROCE of 7.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 12%.

View our latest analysis for Zhejiang Chang'an Renheng Technology

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

What Can We Tell From Zhejiang Chang'an Renheng Technology's ROCE Trend?

Zhejiang Chang'an Renheng Technology has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 29% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 59% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

To sum it up, Zhejiang Chang'an Renheng Technology is collecting higher returns from the same amount of capital, and that's impressive. However the stock is down a substantial 71% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing: We've identified 4 warning signs with Zhejiang Chang'an Renheng Technology (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

While Zhejiang Chang'an Renheng Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.