Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Zhou Hei Ya International Holdings (HKG:1458), it didn't seem to tick all of these boxes.

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 Zhou Hei Ya International Holdings is:

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

0.011 = CN¥59m ÷ (CN¥6.6b - CN¥1.0b) (Based on the trailing twelve months to June 2022).

So, Zhou Hei Ya International Holdings has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.6%.

Check out our latest analysis for Zhou Hei Ya International Holdings

In the above chart we have measured Zhou Hei Ya International Holdings' 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 Zhou Hei Ya International Holdings here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Zhou Hei Ya International Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 1.1%. However it looks like Zhou Hei Ya International Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Zhou Hei Ya International Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Zhou Hei Ya International Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 46% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Zhou Hei Ya International Holdings and understanding them should be part of your investment process.

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.