Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Zhejiang Zhaolong Interconnect TechnologyLtd (SZSE:300913) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Zhaolong Interconnect TechnologyLtd:

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

0.081 = CN¥90m ÷ (CN¥1.3b - CN¥156m) (Based on the trailing twelve months to March 2024).

So, Zhejiang Zhaolong Interconnect TechnologyLtd has an ROCE of 8.1%. On its own that's a low return, but compared to the average of 6.7% generated by the Electrical industry, it's much better.

Above you can see how the current ROCE for Zhejiang Zhaolong Interconnect TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Zhaolong Interconnect TechnologyLtd for free.

What Can We Tell From Zhejiang Zhaolong Interconnect TechnologyLtd's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 27% five years ago, while the business's capital employed increased by 268%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Zhejiang Zhaolong Interconnect TechnologyLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Zhejiang Zhaolong Interconnect TechnologyLtd has done well to pay down its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, Zhejiang Zhaolong Interconnect TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 243% gain to shareholders who have held over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Zhejiang Zhaolong Interconnect TechnologyLtd that we think you should be aware of.

While Zhejiang Zhaolong Interconnect TechnologyLtd 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.