Zhejiang Chang'an Renheng Technology (HKG:8139) Is Doing The Right Things To Multiply Its Share Price

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. The formula for this calculation on Zhejiang Chang'an Renheng Technology is:

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

0.074 = CN¥11m ÷ (CN¥278m - CN¥133m) (Based on the trailing twelve months to March 2023).

Therefore, Zhejiang Chang'an Renheng Technology has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 15%.

Check out 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?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 7.4%. The amount of capital employed has increased too, by 60%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Zhejiang Chang'an Renheng Technology has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Zhejiang Chang'an Renheng Technology's ROCE

All in all, it's terrific to see that Zhejiang Chang'an Renheng Technology is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 57% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 3 warning signs with Zhejiang Chang'an Renheng Technology (at least 2 which make us uncomfortable) , 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.