Zhongsheng Group Holdings (HKG:881) Might Become A Compounding Machine

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Ergo, when we looked at the ROCE trends at Zhongsheng Group Holdings (HKG:881), we liked what we saw.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Zhongsheng Group Holdings is:

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

0.22 = CN¥13b ÷ (CN¥85b - CN¥28b) (Based on the trailing twelve months to December 2021).

So, Zhongsheng Group Holdings has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

View our latest analysis for Zhongsheng Group Holdings

In the above chart we have measured Zhongsheng Group Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Zhongsheng Group Holdings' ROCE Trend?

It's hard not to be impressed by Zhongsheng Group Holdings' returns on capital. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 255% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Zhongsheng Group Holdings can keep this up, we'd be very optimistic about its future.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 33% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Zhongsheng Group Holdings' ROCE

In short, we'd argue Zhongsheng Group Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 395% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a final note, we've found 2 warning signs for Zhongsheng Group Holdings that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.