Investors Could Be Concerned With Zhen Ding Technology Holding's (TWSE:4958) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Zhen Ding Technology Holding (TWSE:4958), we don't think it's current trends fit the mold of a multi-bagger.

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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. Analysts use this formula to calculate it for Zhen Ding Technology Holding:

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

0.059 = NT$12b ÷ (NT$266b - NT$69b) (Based on the trailing twelve months to December 2024).

Therefore, Zhen Ding Technology Holding has an ROCE of 5.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.4%.

Check out our latest analysis for Zhen Ding Technology Holding

In the above chart we have measured Zhen Ding Technology Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zhen Ding Technology Holding for free.

How Are Returns Trending?

In terms of Zhen Ding Technology Holding's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Zhen Ding Technology Holding's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhen Ding Technology Holding is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 33% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a separate note, we've found 1 warning sign for Zhen Ding Technology Holding you'll probably want to know about.

While Zhen Ding Technology Holding 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.