Be Wary Of Zhejiang Hailide New MaterialLtd (SZSE:002206) And Its Returns On Capital

Simply Wall St ·  Jan 23 01:28

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Zhejiang Hailide New MaterialLtd (SZSE:002206) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. To calculate this metric for Zhejiang Hailide New MaterialLtd, this is the formula:

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

0.091 = CN¥397m ÷ (CN¥7.6b - CN¥3.2b) (Based on the trailing twelve months to September 2023).

Thus, Zhejiang Hailide New MaterialLtd has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

View our latest analysis for Zhejiang Hailide New MaterialLtd

SZSE:002206 Return on Capital Employed January 23rd 2024

In the above chart we have measured Zhejiang Hailide New MaterialLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Zhejiang Hailide New MaterialLtd.

What Does the ROCE Trend For Zhejiang Hailide New MaterialLtd Tell Us?

When we looked at the ROCE trend at Zhejiang Hailide New MaterialLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Zhejiang Hailide New MaterialLtd has a high ratio of current liabilities to total assets of 42%. 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.

What We Can Learn From Zhejiang Hailide New MaterialLtd's ROCE

To conclude, we've found that Zhejiang Hailide New MaterialLtd is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 23% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Zhejiang Hailide New MaterialLtd does have some risks though, and we've spotted 1 warning sign for Zhejiang Hailide New MaterialLtd that you might be interested in.

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.

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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.

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