share_log

Investors Could Be Concerned With Zhiyang Innovation Technology's (SHSE:688191) Returns On Capital

Simply Wall St ·  08/24/2022 07:10

What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Zhiyang Innovation Technology (SHSE:688191) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhiyang Innovation Technology:

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

0.085 = CN¥73m ÷ (CN¥1.2b - CN¥352m) (Based on the trailing twelve months to June 2022).

So, Zhiyang Innovation Technology has an ROCE of 8.5%. On its own, that's a low figure but it's around the 8.5% average generated by the Electrical industry.

View our latest analysis for Zhiyang Innovation Technology

roceSHSE:688191 Return on Capital Employed August 23rd 2022

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, revenue and cash flow of Zhiyang Innovation Technology, check out these free graphs here.

What Does the ROCE Trend For Zhiyang Innovation Technology Tell Us?

On the surface, the trend of ROCE at Zhiyang Innovation Technology doesn't inspire confidence. Around four years ago the returns on capital were 20%, but since then they've fallen to 8.5%. 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.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Zhiyang Innovation Technology is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 36% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching Zhiyang Innovation Technology, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Zhiyang Innovation Technology 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.

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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
    Write a comment