What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Zhuhai Enpower ElectricLtd (SZSE:300681) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Zhuhai Enpower ElectricLtd:

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

0.011 = CN¥28m ÷ (CN¥4.5b - CN¥1.9b) (Based on the trailing twelve months to September 2024).

Thus, Zhuhai Enpower ElectricLtd has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.0%.

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 Zhuhai Enpower ElectricLtd has performed in the past in other metrics, you can view this free graph of Zhuhai Enpower ElectricLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

Zhuhai Enpower ElectricLtd has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 1.1% on its capital. Not only that, but the company is utilizing 262% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 42% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

Overall, Zhuhai Enpower ElectricLtd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 84% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Zhuhai Enpower ElectricLtd can keep these trends up, it could have a bright future ahead.

If you want to continue researching Zhuhai Enpower ElectricLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Zhuhai Enpower ElectricLtd 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.