What should you look for in early trends to identify stocks that have the potential to increase in value over the long term? Typically, you want to look at growth trends. return Increase in capital employed (ROCE) and expand accordingly base of capital employed. Simply put, this type of business is a compound interest machine, meaning you are continually reinvesting your earnings at an ever-higher rate of return.But after a quick look at the numbers, we don't think so. Ziyo Innovation Technology (SHSE:688191) has the potential to become a multibagger in the future, but let's take a look at why.

What is return on capital employed (ROCE)?

For those who have never used ROCE before, it measures the “return” (pre-tax profit) that a company generates from the capital employed in its business. This formula for Zhiyang Innovation Technology is:

Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)

0.051 = 4.5 million CN ÷ (1.3 billion CN – 413 million CN) (Based on the previous 12 months to December 2023).

therefore, Zhiyang Innovation Technology's ROCE is 5.1%. After all, this is a poor return, below the electrical industry average of 6.5%.

Check out our latest analysis for Zhiyang Innovation Technology.

SHSE:688191 Return on Capital Employed on March 19, 2024

Past performance is a great starting point when researching a stock. So, above, you can see his ROCE metrics for Zhiyang Innovation Technology's past returns. If you are interested in delving further into Zhiyang Innovation Technology's past, check out this free A graph covering Zhiyang Innovation Technology's past earnings, revenue and cash flow.

How is Zhiyang Innovation Technology's ROCE trending?

When it comes to Zhiyang Innovation Technology's historical ROCE movement, it's not great. About five years ago, the return on capital was 20%, but it has since fallen to 5.1%. However, given that both capital employed and revenue are increasing, it appears that the business is currently pursuing growth for short-term returns. And if increased capital leads to more profits, the company, and by extension its shareholders, will benefit in the long run.

What we can learn from Zhiyang Innovation Technology's ROCE

Although return on capital has declined in the short term, we can expect Zhiyang Innovation Technology to see both its revenue and capital employed increasing. And its stock price has followed suit, returning the equivalent of 20% to shareholders last year. So while investors seem to be recognizing these encouraging trends, we would like to research this stock further to see if its other metrics justify a positive view.

One more thing: we have identified 3 warning signs Zhiyang Innovation Technology (at least one that cannot be ignored) and understanding these will certainly help.

For those who like investing, solid company, check this out free List of companies with strong balance sheets and high return on equity.

Valuation is complex, but we help make it simple.

To see if Zhiyang Innovation Technology is potentially overvalued or undervalued, check out our comprehensive analysis, including: Fair value estimates, risks and caveats, dividends, insider trading, and financial health.

See free analysis

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.



Source link