If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Shijiazhuang Kelin Electric (SHSE:603050) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shijiazhuang Kelin Electric:

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

0.11 = CN¥330m ÷ (CN¥5.4b - CN¥2.4b) (Based on the trailing twelve months to March 2024).

So, Shijiazhuang Kelin Electric has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 6.0% it's much better.

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'd like to look at how Shijiazhuang Kelin Electric has performed in the past in other metrics, you can view this free graph of Shijiazhuang Kelin Electric's past earnings, revenue and cash flow.

What Can We Tell From Shijiazhuang Kelin Electric's ROCE Trend?

We like the trends that we're seeing from Shijiazhuang Kelin Electric. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 177% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Shijiazhuang Kelin Electric's current liabilities are still rather high at 44% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shijiazhuang Kelin Electric's ROCE

All in all, it's terrific to see that Shijiazhuang Kelin Electric is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 300% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Shijiazhuang Kelin Electric can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Shijiazhuang Kelin Electric, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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