To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Zoje Resources Investment (SZSE:002021) and its trend of ROCE, we really liked what we saw.

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 Zoje Resources Investment is:

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

0.0038 = CN¥2.4m ÷ (CN¥922m - CN¥281m) (Based on the trailing twelve months to September 2024).

Therefore, Zoje Resources Investment has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.2%.

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

So How Is Zoje Resources Investment's ROCE Trending?

We're delighted to see that Zoje Resources Investment is reaping rewards from its investments and has now broken into profitability. The company now earns 0.4% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line

In summary, we're delighted to see that Zoje Resources Investment has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 134% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 002021 on our platform that is definitely worth checking out.

While Zoje Resources Investment may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.