If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. However, after investigating Zhongshan Public Utilities GroupLtd (SZSE:000685), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. The formula for this calculation on Zhongshan Public Utilities GroupLtd is:

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

0.024 = CN¥542m ÷ (CN¥29b - CN¥6.8b) (Based on the trailing twelve months to March 2024).

So, Zhongshan Public Utilities GroupLtd has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 5.4%.

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 Zhongshan Public Utilities GroupLtd has performed in the past in other metrics, you can view this free graph of Zhongshan Public Utilities GroupLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Zhongshan Public Utilities GroupLtd Tell Us?

There are better returns on capital out there than what we're seeing at Zhongshan Public Utilities GroupLtd. The company has consistently earned 2.4% for the last five years, and the capital employed within the business has risen 48% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

In summary, Zhongshan Public Utilities GroupLtd has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 12% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Zhongshan Public Utilities GroupLtd does have some risks though, and we've spotted 2 warning signs for Zhongshan Public Utilities GroupLtd that you might be interested in.

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.

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