If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Zhejiang Changsheng Sliding Bearings' (SZSE:300718) ROCE trend, we were pretty happy with what we saw.
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 Zhejiang Changsheng Sliding Bearings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = CN¥232m ÷ (CN¥1.8b - CN¥193m) (Based on the trailing twelve months to September 2023).
Therefore, Zhejiang Changsheng Sliding Bearings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.1% generated by the Machinery industry.
View our latest analysis for Zhejiang Changsheng Sliding Bearings
Above you can see how the current ROCE for Zhejiang Changsheng Sliding Bearings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Zhejiang Changsheng Sliding Bearings.
What Can We Tell From Zhejiang Changsheng Sliding Bearings' ROCE Trend?
While the returns on capital are good, they haven't moved much. The company has employed 46% more capital in the last five years, and the returns on that capital have remained stable at 14%. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line On Zhejiang Changsheng Sliding Bearings' ROCE
In the end, Zhejiang Changsheng Sliding Bearings has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing to note, we've identified 2 warning signs with Zhejiang Changsheng Sliding Bearings and understanding these should be part of your investment process.
While Zhejiang Changsheng Sliding Bearings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.