There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Zhejiang Sanhua Intelligent ControlsLtd's (SZSE:002050) trend of ROCE, we 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. Analysts use this formula to calculate it for Zhejiang Sanhua Intelligent ControlsLtd:

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

0.16 = CN¥3.5b ÷ (CN¥34b - CN¥13b) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang Sanhua Intelligent ControlsLtd has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.2% it's much better.

In the above chart we have measured Zhejiang Sanhua Intelligent ControlsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Sanhua Intelligent ControlsLtd .

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 132% more capital into its operations. 16% is a pretty standard return, and it provides some comfort knowing that Zhejiang Sanhua Intelligent ControlsLtd has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Zhejiang Sanhua Intelligent ControlsLtd's ROCE

In the end, Zhejiang Sanhua Intelligent ControlsLtd has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 104% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to continue researching Zhejiang Sanhua Intelligent ControlsLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Zhejiang Sanhua Intelligent ControlsLtd isn't earning the highest return, check out this free list of companies that are 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.