To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, the ROCE of Zhejiang Jingsheng Mechanical & Electrical (SZSE:300316) looks great, so lets see what the trend can tell us.

What Is 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 Jingsheng Mechanical & Electrical, this is the formula:

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

0.30 = CN¥5.7b ÷ (CN¥35b - CN¥16b) (Based on the trailing twelve months to June 2024).

Thus, Zhejiang Jingsheng Mechanical & Electrical has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 4.8%.

Above you can see how the current ROCE for Zhejiang Jingsheng Mechanical & Electrical compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Jingsheng Mechanical & Electrical .

What The Trend Of ROCE Can Tell Us

Zhejiang Jingsheng Mechanical & Electrical is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 30%. The amount of capital employed has increased too, by 333%. So we're very much inspired by what we're seeing at Zhejiang Jingsheng Mechanical & Electrical thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 45% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On Zhejiang Jingsheng Mechanical & Electrical's ROCE

All in all, it's terrific to see that Zhejiang Jingsheng Mechanical & Electrical is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 63% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 2 warning signs we've spotted with Zhejiang Jingsheng Mechanical & Electrical (including 1 which is concerning) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.