Investors Shouldn't Overlook The Favourable Returns On Capital At Zhongsheng Group Holdings (HKG:881)

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Zhongsheng Group Holdings' (HKG:881) trend of ROCE, we really liked what we saw.

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. To calculate this metric for Zhongsheng Group Holdings, this is the formula:

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

0.22 = CN¥12b ÷ (CN¥85b - CN¥28b) (Based on the trailing twelve months to December 2021).

Therefore, Zhongsheng Group Holdings has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 10%.

See our latest analysis for Zhongsheng Group Holdings

Above you can see how the current ROCE for Zhongsheng Group Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Zhongsheng Group Holdings.

What The Trend Of ROCE Can Tell Us

Zhongsheng Group Holdings deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 255% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Zhongsheng Group Holdings can keep this up, we'd be very optimistic about its future.

On a side note, Zhongsheng Group Holdings has done well to reduce current liabilities to 33% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Zhongsheng Group Holdings' ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And long term investors would be thrilled with the 235% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Zhongsheng Group Holdings does have some risks though, and we've spotted 1 warning sign for Zhongsheng Group Holdings that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.