What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Zhejiang Jingsheng Mechanical & Electrical (SZSE:300316) looks great, so lets see what the trend can tell us.

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 Jingsheng Mechanical & Electrical, this is the formula:

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

0.33 = CN¥6.2b ÷ (CN¥37b - CN¥18b) (Based on the trailing twelve months to March 2024).

So, Zhejiang Jingsheng Mechanical & Electrical has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 3.9% earned by companies in a similar industry.

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.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Zhejiang Jingsheng Mechanical & Electrical are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 33%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 323%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 49% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

Our Take On Zhejiang Jingsheng Mechanical & Electrical's ROCE

To sum it up, Zhejiang Jingsheng Mechanical & Electrical has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 160% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

If you want to know some of the risks facing Zhejiang Jingsheng Mechanical & Electrical we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.