Zhejiang Chang'an Renheng Technology (HKG:8139) Might Have The Makings Of A Multi-Bagger

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 on that note, Zhejiang Chang'an Renheng Technology (HKG:8139) looks quite promising in regards to its trends of return on capital.

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

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. 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)

0.081 = CN¥14m ÷ (CN¥280m - CN¥108m) (Based on the trailing twelve months to June 2023).

Thus, Zhejiang Chang'an Renheng Technology has an ROCE of 8.1%. On its own, that's a low figure but it's around the 9.3% average generated by the Chemicals industry.

See 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 Does the ROCE Trend For Zhejiang Chang'an Renheng Technology Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 63%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

In summary, it's great to see that Zhejiang Chang'an Renheng Technology can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has dived 78% over the last five years, there may be other factors affecting the company's prospects. 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 Zhejiang Chang'an Renheng Technology, we've spotted 3 warning signs, and 2 of them are a bit unpleasant.

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.