If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Transfar Zhilian (SZSE:002010), 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. Analysts use this formula to calculate it for Transfar Zhilian:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = CN¥1.1b ÷ (CN¥42b - CN¥13b) (Based on the trailing twelve months to September 2023).
Thus, Transfar Zhilian has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Transfar Zhilian's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Transfar Zhilian.
How Are Returns Trending?
In terms of Transfar Zhilian's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.5%, but since then they've fallen to 3.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
What We Can Learn From Transfar Zhilian's ROCE
In summary, we're somewhat concerned by Transfar Zhilian's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 47% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to know some of the risks facing Transfar Zhilian we've found 4 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
While Transfar Zhilian 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.