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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. With that in mind, the ROCE of Zhejiang Jinghua Laser TechnologyLtd (SHSE:603607) looks decent, right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Zhejiang Jinghua Laser TechnologyLtd is:

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

0.10 = CN¥108m ÷ (CN¥1.6b - CN¥560m) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang Jinghua Laser TechnologyLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Forestry industry.

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 Jinghua Laser TechnologyLtd's past further, check out this free graph covering Zhejiang Jinghua Laser TechnologyLtd's past earnings, revenue and cash flow.

So How Is Zhejiang Jinghua Laser TechnologyLtd's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 10% and the business has deployed 29% more capital into its operations. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 35% of total assets, this reported ROCE would probably be less than10% because total capital employed would be higher.The 10% ROCE could be even lower if current liabilities weren't 35% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

What We Can Learn From Zhejiang Jinghua Laser TechnologyLtd's ROCE

The main thing to remember is that Zhejiang Jinghua Laser TechnologyLtd has proven its ability to continually reinvest at respectable rates of return. Therefore it's no surprise that shareholders have earned a respectable 59% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a final note, we found 2 warning signs for Zhejiang Jinghua Laser TechnologyLtd (1 is concerning) 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.