If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Zhe Jiang Li Zi Yuan FoodLtd (SHSE:605337), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Zhe Jiang Li Zi Yuan FoodLtd is:

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

0.08 = CN¥186m ÷ (CN¥2.9b - CN¥563m) (Based on the trailing twelve months to September 2024).

So, Zhe Jiang Li Zi Yuan FoodLtd has an ROCE of 8.0%. On its own, that's a low figure but it's around the 6.8% average generated by the Food industry.

Above you can see how the current ROCE for Zhe Jiang Li Zi Yuan FoodLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhe Jiang Li Zi Yuan FoodLtd .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Zhe Jiang Li Zi Yuan FoodLtd, we didn't gain much confidence. Around five years ago the returns on capital were 38%, but since then they've fallen to 8.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Zhe Jiang Li Zi Yuan FoodLtd has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Zhe Jiang Li Zi Yuan FoodLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Zhe Jiang Li Zi Yuan FoodLtd's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 56% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Like most companies, Zhe Jiang Li Zi Yuan FoodLtd does come with some risks, and we've found 2 warning signs that you should be aware of.

While Zhe Jiang Li Zi Yuan FoodLtd 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.