What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Zhongshan Public Utilities GroupLtd (SZSE:000685), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Zhongshan Public Utilities GroupLtd is:

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

0.022 = CN¥452m ÷ (CN¥27b - CN¥6.7b) (Based on the trailing twelve months to September 2023).

Therefore, Zhongshan Public Utilities GroupLtd has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 7.1%.

View our latest analysis for Zhongshan Public Utilities GroupLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhongshan Public Utilities GroupLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Zhongshan Public Utilities GroupLtd, check out these free graphs here.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Zhongshan Public Utilities GroupLtd. The company has consistently earned 2.2% for the last five years, and the capital employed within the business has risen 41% in that time. 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.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 24% of total assets, this reported ROCE would probably be less than2.2% because total capital employed would be higher.The 2.2% ROCE could be even lower if current liabilities weren't 24% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

Our Take On Zhongshan Public Utilities GroupLtd's ROCE

In conclusion, Zhongshan Public Utilities GroupLtd has been investing more capital into the business, but returns on that capital haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 20% 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.

One more thing to note, we've identified 2 warning signs with Zhongshan Public Utilities GroupLtd and understanding them should be part of your investment process.

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.