There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Jiangsu Zhongtian Technology (SHSE:600522), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Jiangsu Zhongtian Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = CN¥2.9b ÷ (CN¥54b - CN¥17b) (Based on the trailing twelve months to March 2024).
So, Jiangsu Zhongtian Technology has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 6.0% generated by the Electrical industry, it's much better.
Above you can see how the current ROCE for Jiangsu Zhongtian Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jiangsu Zhongtian Technology .
How Are Returns Trending?
The returns on capital haven't changed much for Jiangsu Zhongtian Technology in recent years. Over the past five years, ROCE has remained relatively flat at around 7.9% and the business has deployed 47% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Key Takeaway
In conclusion, Jiangsu Zhongtian Technology has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 58% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you're still interested in Jiangsu Zhongtian Technology it's worth checking out our FREE intrinsic value approximation for 600522 to see if it's trading at an attractive price in other respects.
While Jiangsu Zhongtian Technology 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.