To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Zhejiang Zhaolong Interconnect TechnologyLtd (SZSE:300913), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Zhejiang Zhaolong Interconnect TechnologyLtd, this is the formula:

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

0.084 = CN¥85m ÷ (CN¥1.2b - CN¥169m) (Based on the trailing twelve months to June 2023).

Therefore, Zhejiang Zhaolong Interconnect TechnologyLtd has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Electrical industry average of 6.3%.

See our latest analysis for Zhejiang Zhaolong Interconnect TechnologyLtd

In the above chart we have measured Zhejiang Zhaolong Interconnect TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Zhejiang Zhaolong Interconnect TechnologyLtd.

How Are Returns Trending?

When we looked at the ROCE trend at Zhejiang Zhaolong Interconnect TechnologyLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 28% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Zhejiang Zhaolong Interconnect TechnologyLtd has done well to pay down its current liabilities to 14% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Zhejiang Zhaolong Interconnect TechnologyLtd is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 124% gain to shareholders who have held over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for Zhejiang Zhaolong Interconnect TechnologyLtd that we think 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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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.