If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Zhejiang Century Huatong GroupLtd (SZSE:002602) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Zhejiang Century Huatong GroupLtd, this is the formula:

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

0.068 = CN¥2.0b ÷ (CN¥38b - CN¥8.7b) (Based on the trailing twelve months to March 2024).

Therefore, Zhejiang Century Huatong GroupLtd has an ROCE of 6.8%. In absolute terms, that's a low return, but it's much better than the Entertainment industry average of 5.4%.

In the above chart we have measured Zhejiang Century Huatong GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhejiang Century Huatong GroupLtd .

How Are Returns Trending?

On the surface, the trend of ROCE at Zhejiang Century Huatong GroupLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.8% from 8.8% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Zhejiang Century Huatong GroupLtd's current liabilities have increased over the last five years to 23% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 6.8%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

While returns have fallen for Zhejiang Century Huatong GroupLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 65% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Zhejiang Century Huatong GroupLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 002602 on our platform quite valuable.

While Zhejiang Century Huatong GroupLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com