Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Speaking of which, we noticed some great changes in Zhe Jiang KangshengLtd's (SZSE:002418) returns on capital, so let's have a look.

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 Zhe Jiang KangshengLtd is:

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

0.01 = CN¥17m ÷ (CN¥2.5b - CN¥876m) (Based on the trailing twelve months to June 2024).

So, Zhe Jiang KangshengLtd has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 7.0%.

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

What The Trend Of ROCE Can Tell Us

Zhe Jiang KangshengLtd has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.0% on its capital. Not only that, but the company is utilizing 40% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 34%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

To the delight of most shareholders, Zhe Jiang KangshengLtd has now broken into profitability. And since the stock has fallen 13% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know more about Zhe Jiang KangshengLtd, we've spotted 3 warning signs, and 1 of them is concerning.

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.