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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Zhongtong Bus Holding (SZSE:000957) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Zhongtong Bus Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = CN¥229m ÷ (CN¥8.4b - CN¥5.3b) (Based on the trailing twelve months to September 2023).
So, Zhongtong Bus Holding has an ROCE of 7.3%. On its own, that's a low figure but it's around the 6.1% average generated by the Machinery industry.
View our latest analysis for Zhongtong Bus Holding
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhongtong Bus Holding's ROCE against it's prior returns. If you'd like to look at how Zhongtong Bus Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We're pretty happy with how the ROCE has been trending at Zhongtong Bus Holding. The figures show that over the last five years, returns on capital have grown by 70%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 29% less capital than it was five years ago. Zhongtong Bus Holding may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a side note, Zhongtong Bus Holding's current liabilities are still rather high at 63% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Zhongtong Bus Holding's ROCE
In summary, it's great to see that Zhongtong Bus Holding has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 40% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
Zhongtong Bus Holding does have some risks though, and we've spotted 1 warning sign for Zhongtong Bus Holding that you might be interested in.
While Zhongtong Bus Holding 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.
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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.