If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Zhongshan Public Utilities GroupLtd (SZSE:000685) and its ROCE trend, we weren't exactly thrilled.
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 Zhongshan Public Utilities GroupLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = CN¥488m ÷ (CN¥30b - CN¥5.5b) (Based on the trailing twelve months to September 2024).
So, Zhongshan Public Utilities GroupLtd has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 6.2%.
View our latest analysis for Zhongshan Public Utilities GroupLtd
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhongshan Public Utilities GroupLtd's past further, check out this free graph covering Zhongshan Public Utilities GroupLtd's past earnings, revenue and cash flow.
There are better returns on capital out there than what we're seeing at Zhongshan Public Utilities GroupLtd. The company has employed 59% more capital in the last five years, and the returns on that capital have remained stable at 2.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
As we've seen above, Zhongshan Public Utilities GroupLtd's returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 29% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
On a final note, we found 2 warning signs for Zhongshan Public Utilities GroupLtd (1 doesn't sit too well with us) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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