There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Zhe Kuang Heavy IndustryLtd (SZSE:300837) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Zhe Kuang Heavy IndustryLtd:

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

0.12 = CN¥195m ÷ (CN¥2.1b - CN¥429m) (Based on the trailing twelve months to September 2023).

So, Zhe Kuang Heavy IndustryLtd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.1% it's much better.

In the above chart we have measured Zhe Kuang Heavy IndustryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Zhe Kuang Heavy IndustryLtd .

What Does the ROCE Trend For Zhe Kuang Heavy IndustryLtd Tell Us?

On the surface, the trend of ROCE at Zhe Kuang Heavy IndustryLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 22% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Zhe Kuang Heavy IndustryLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Zhe Kuang Heavy IndustryLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 49% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Zhe Kuang Heavy IndustryLtd has the makings of a multi-bagger.

On a final note, we found 2 warning signs for Zhe Kuang Heavy IndustryLtd (1 shouldn't be ignored) you should be aware of.

While Zhe Kuang Heavy IndustryLtd 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.