If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Shenzhen Zhongzhuang Construction GroupLtd (SZSE:002822) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
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 Shenzhen Zhongzhuang Construction GroupLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = CN¥83m ÷ (CN¥8.9b - CN¥3.8b) (Based on the trailing twelve months to June 2023).
Therefore, Shenzhen Zhongzhuang Construction GroupLtd has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.6%.
See our latest analysis for Shenzhen Zhongzhuang Construction GroupLtd
SZSE:002822 Return on Capital Employed September 4th 2023
Historical performance is a great place to start when researching a stock so above you can see the gauge for Shenzhen Zhongzhuang Construction GroupLtd's ROCE against it's prior returns. If you're interested in investigating Shenzhen Zhongzhuang Construction GroupLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Shenzhen Zhongzhuang Construction GroupLtd's ROCE Trend?
On the surface, the trend of ROCE at Shenzhen Zhongzhuang Construction GroupLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.6% from 12% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, Shenzhen Zhongzhuang Construction GroupLtd has decreased its current liabilities to 42% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 42% is still pretty high, so those risks are still somewhat prevalent.
The Bottom Line On Shenzhen Zhongzhuang Construction GroupLtd's ROCE
We're a bit apprehensive about Shenzhen Zhongzhuang Construction GroupLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you want to continue researching Shenzhen Zhongzhuang Construction GroupLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
