If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after investigating Zhejiang Hengtong HoldingLtd (SHSE:600226), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Zhejiang Hengtong HoldingLtd is:

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

0.0094 = CN¥37m ÷ (CN¥4.4b - CN¥412m) (Based on the trailing twelve months to March 2024).

Therefore, Zhejiang Hengtong HoldingLtd has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhejiang Hengtong HoldingLtd's past further, check out this free graph covering Zhejiang Hengtong HoldingLtd's past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Hengtong HoldingLtd's ROCE Trend?

Over the past five years, Zhejiang Hengtong HoldingLtd's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Zhejiang Hengtong HoldingLtd to be a multi-bagger going forward.

The Key Takeaway

In summary, Zhejiang Hengtong HoldingLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 28% over the last five years, investors may not be too optimistic on this trend improving either. 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, Zhejiang Hengtong HoldingLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.