To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at the ROCE trend of Zhejiang Jingsheng Mechanical & Electrical (SZSE:300316) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Zhejiang Jingsheng Mechanical & Electrical is:

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

0.35 = CN¥5.5b ÷ (CN¥36b - CN¥20b) (Based on the trailing twelve months to September 2023).

So, Zhejiang Jingsheng Mechanical & Electrical has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 5.3%.

Above you can see how the current ROCE for Zhejiang Jingsheng Mechanical & Electrical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Jingsheng Mechanical & Electrical for free.

So How Is Zhejiang Jingsheng Mechanical & Electrical's ROCE Trending?

We like the trends that we're seeing from Zhejiang Jingsheng Mechanical & Electrical. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 35%. The amount of capital employed has increased too, by 275%. So we're very much inspired by what we're seeing at Zhejiang Jingsheng Mechanical & Electrical thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 56% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

All in all, it's terrific to see that Zhejiang Jingsheng Mechanical & Electrical is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 156% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Zhejiang Jingsheng Mechanical & Electrical can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhejiang Jingsheng Mechanical & Electrical (of which 1 is a bit concerning!) that you should know about.

Zhejiang Jingsheng Mechanical & Electrical is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.