There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shenzhen Zhaowei Machinery & Electronics (SZSE:003021), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shenzhen Zhaowei Machinery & Electronics:

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

0.04 = CN¥130m ÷ (CN¥3.8b - CN¥603m) (Based on the trailing twelve months to March 2024).

Therefore, Shenzhen Zhaowei Machinery & Electronics has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.0%.

In the above chart we have measured Shenzhen Zhaowei Machinery & Electronics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shenzhen Zhaowei Machinery & Electronics for free.

What Can We Tell From Shenzhen Zhaowei Machinery & Electronics' ROCE Trend?

On the surface, the trend of ROCE at Shenzhen Zhaowei Machinery & Electronics doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.0% from 47% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shenzhen Zhaowei Machinery & Electronics has done well to pay down its current liabilities to 16% 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.

Our Take On Shenzhen Zhaowei Machinery & Electronics' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shenzhen Zhaowei Machinery & Electronics is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 27% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Shenzhen Zhaowei Machinery & Electronics does have some risks though, and we've spotted 2 warning signs for Shenzhen Zhaowei Machinery & Electronics that you might be interested in.

While Shenzhen Zhaowei Machinery & Electronics 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.