If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Jiangsu Zeyu Intelligent PowerLtd (SZSE:301179), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Jiangsu Zeyu Intelligent PowerLtd is:

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

0.084 = CN¥196m ÷ (CN¥3.5b - CN¥1.1b) (Based on the trailing twelve months to March 2024).

So, Jiangsu Zeyu Intelligent PowerLtd has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the IT industry average of 3.9%.

In the above chart we have measured Jiangsu Zeyu Intelligent PowerLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Zeyu Intelligent PowerLtd for free.

What Does the ROCE Trend For Jiangsu Zeyu Intelligent PowerLtd Tell Us?

On the surface, the trend of ROCE at Jiangsu Zeyu Intelligent PowerLtd doesn't inspire confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 8.4%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Jiangsu Zeyu Intelligent PowerLtd has decreased its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, Jiangsu Zeyu Intelligent PowerLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 19% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Jiangsu Zeyu Intelligent PowerLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com