If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think Zhejiang Jiaxin SilkLtd (SZSE:002404) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Zhejiang Jiaxin SilkLtd, this is the formula:

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

0.084 = CN¥174m ÷ (CN¥3.5b - CN¥1.4b) (Based on the trailing twelve months to June 2024).

So, Zhejiang Jiaxin SilkLtd has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 6.1% generated by the Luxury industry, it's much better.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Jiaxin SilkLtd's ROCE against it's prior returns. If you'd like to look at how Zhejiang Jiaxin SilkLtd has performed in the past in other metrics, you can view this free graph of Zhejiang Jiaxin SilkLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

Over the past five years, Zhejiang Jiaxin SilkLtd's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Zhejiang Jiaxin SilkLtd doesn't end up being a multi-bagger in a few years time.

On a separate but related note, it's important to know that Zhejiang Jiaxin SilkLtd has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Zhejiang Jiaxin SilkLtd's ROCE

We can conclude that in regards to Zhejiang Jiaxin SilkLtd's returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly, the stock has only gained 30% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Zhejiang Jiaxin SilkLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002404 on our platform quite valuable.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.