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Zhejiang Chang'an Renheng Technology (HKG:8139) Could Be At Risk Of Shrinking As A Company

Simply Wall St · 3d ago

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Zhejiang Chang'an Renheng Technology (HKG:8139) we aren't filled with optimism, but let's investigate further.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhejiang Chang'an Renheng Technology:

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

0.031 = CN¥4.0m ÷ (CN¥345m - CN¥215m) (Based on the trailing twelve months to June 2025).

Thus, Zhejiang Chang'an Renheng Technology has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.5%.

See our latest analysis for Zhejiang Chang'an Renheng Technology

roce
SEHK:8139 Return on Capital Employed December 22nd 2025

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 Zhejiang Chang'an Renheng Technology's past further, check out this free graph covering Zhejiang Chang'an Renheng Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Zhejiang Chang'an Renheng Technology. Unfortunately the returns on capital have diminished from the 5.5% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Zhejiang Chang'an Renheng Technology becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 62%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 3.1%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Zhejiang Chang'an Renheng Technology's ROCE

In summary, it's unfortunate that Zhejiang Chang'an Renheng Technology is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 51% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Zhejiang Chang'an Renheng Technology we've found 4 warning signs (3 can't be ignored!) that you should be aware of before investing here.

While Zhejiang Chang'an Renheng Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.