What are the early trends we should look for to identify a stock that could 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Zhejiang grandwall electric science&technologyltd (SHSE:603897) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Zhejiang grandwall electric science&technologyltd is:

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

0.041 = CN¥112m ÷ (CN¥6.0b - CN¥3.3b) (Based on the trailing twelve months to September 2023).

Thus, Zhejiang grandwall electric science&technologyltd has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.3%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang grandwall electric science&technologyltd.

What Can We Tell From Zhejiang grandwall electric science&technologyltd's ROCE Trend?

When we looked at the ROCE trend at Zhejiang grandwall electric science&technologyltd, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 55%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Zhejiang grandwall electric science&technologyltd's ROCE

Bringing it all together, while we're somewhat encouraged by Zhejiang grandwall electric science&technologyltd's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 17% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 2 warning signs for Zhejiang grandwall electric science&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.