What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 Zhejiang Sanfer Electric (SHSE:605336), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Zhejiang Sanfer Electric:

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

0.11 = CN¥203m ÷ (CN¥2.3b - CN¥412m) (Based on the trailing twelve months to June 2023).

Therefore, Zhejiang Sanfer Electric has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Consumer Durables industry.

See our latest analysis for Zhejiang Sanfer Electric

Above you can see how the current ROCE for Zhejiang Sanfer Electric 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Zhejiang Sanfer Electric Tell Us?

On the surface, the trend of ROCE at Zhejiang Sanfer Electric doesn't inspire confidence. Around five years ago the returns on capital were 43%, but since then they've fallen to 11%. However it looks like Zhejiang Sanfer Electric might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Zhejiang Sanfer Electric has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Zhejiang Sanfer Electric's ROCE

In summary, Zhejiang Sanfer Electric is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 2.3% to shareholders over the last year. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to continue researching Zhejiang Sanfer Electric, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Zhejiang Sanfer Electric 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.