What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Ergo, when we looked at the ROCE trends at ZJMI Environmental Energy (SHSE:603071), we liked what we saw.

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. The formula for this calculation on ZJMI Environmental Energy is:

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

0.31 = CN¥1.6b ÷ (CN¥12b - CN¥7.3b) (Based on the trailing twelve months to September 2022).

Thus, ZJMI Environmental Energy has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

Check out our latest analysis for ZJMI Environmental Energy

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 ZJMI Environmental Energy, check out these free graphs here.

The Trend Of ROCE

ZJMI Environmental Energy deserves to be commended in regards to it's returns. The company has employed 93% more capital in the last three years, and the returns on that capital have remained stable at 31%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If ZJMI Environmental Energy can keep this up, we'd be very optimistic about its future.

Another thing to note, ZJMI Environmental Energy has a high ratio of current liabilities to total assets of 58%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

ZJMI Environmental Energy has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Yet over the last year the stock has declined 20%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

ZJMI Environmental Energy does have some risks though, and we've spotted 1 warning sign for ZJMI Environmental Energy that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.