What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Zhejiang Shibao (HKG:1057) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Zhejiang Shibao is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = CN¥127m ÷ (CN¥2.8b - CN¥856m) (Based on the trailing twelve months to June 2024).
Thus, Zhejiang Shibao has an ROCE of 6.6%. In absolute terms, that's a low return but it's around the Auto Components industry average of 6.0%.
Check out our latest analysis for Zhejiang Shibao
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Shibao.
What Does the ROCE Trend For Zhejiang Shibao Tell Us?
We're delighted to see that Zhejiang Shibao is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.6% on its capital. And unsurprisingly, like most companies trying to break into the black, Zhejiang Shibao is utilizing 25% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
Our Take On Zhejiang Shibao's ROCE
Overall, Zhejiang Shibao gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 158% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Zhejiang Shibao can keep these trends up, it could have a bright future ahead.
Like most companies, Zhejiang Shibao does come with some risks, and we've found 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.