What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at Zhongtong Bus HoldingLTD (SZSE:000957) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Zhongtong Bus HoldingLTD is:

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

0.068 = CN¥220m ÷ (CN¥8.4b - CN¥5.1b) (Based on the trailing twelve months to June 2024).

So, Zhongtong Bus HoldingLTD has an ROCE of 6.8%. On its own that's a low return, but compared to the average of 5.6% generated by the Machinery industry, it's much better.

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 Zhongtong Bus HoldingLTD's past further, check out this free graph covering Zhongtong Bus HoldingLTD's past earnings, revenue and cash flow.

So How Is Zhongtong Bus HoldingLTD's ROCE Trending?

Over the past five years, Zhongtong Bus HoldingLTD's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Zhongtong Bus HoldingLTD in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Another thing to note, Zhongtong Bus HoldingLTD has a high ratio of current liabilities to total assets of 61%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Zhongtong Bus HoldingLTD's ROCE

In a nutshell, Zhongtong Bus HoldingLTD has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be recognizing these trends since the stock has only returned a total of 37% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing to note, we've identified 1 warning sign with Zhongtong Bus HoldingLTD and understanding it should be part of your investment process.

While Zhongtong Bus HoldingLTD may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.