Zhonggan Communication (Group) Holdings (HKG:2545) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Zhonggan Communication (Group) Holdings (HKG:2545) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Understanding 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. The formula for this calculation on Zhonggan Communication (Group) Holdings is:

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

0.057 = CN¥24m ÷ (CN¥1.4b - CN¥986m) (Based on the trailing twelve months to June 2025).

Therefore, Zhonggan Communication (Group) Holdings has an ROCE of 5.7%. Even though it's in line with the industry average of 5.7%, it's still a low return by itself.

Check out our latest analysis for Zhonggan Communication (Group) Holdings

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'd like to look at how Zhonggan Communication (Group) Holdings has performed in the past in other metrics, you can view this free graph of Zhonggan Communication (Group) Holdings' past earnings, revenue and cash flow.

What Does the ROCE Trend For Zhonggan Communication (Group) Holdings Tell Us?

When we looked at the ROCE trend at Zhonggan Communication (Group) Holdings, we didn't gain much confidence. Around three years ago the returns on capital were 31%, but since then they've fallen to 5.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Zhonggan Communication (Group) Holdings has done well to pay down its current liabilities to 70% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Zhonggan Communication (Group) Holdings' ROCE

In summary, we're somewhat concerned by Zhonggan Communication (Group) Holdings' diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 23% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 3 warning signs with Zhonggan Communication (Group) Holdings (at least 2 which make us uncomfortable) , and understanding them would certainly be useful.

While Zhonggan Communication (Group) Holdings 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.