To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in Shanghai Zhongyida's (SHSE:900906) returns on capital, so let's have a look.

What Is 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. To calculate this metric for Shanghai Zhongyida, this is the formula:

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

0.11 = CN¥105m ÷ (CN¥1.2b - CN¥246m) (Based on the trailing twelve months to September 2022).

Thus, Shanghai Zhongyida has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.6% it's much better.

See our latest analysis for Shanghai Zhongyida

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 Shanghai Zhongyida has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at Shanghai Zhongyida. We found that the returns on capital employed over the last five years have risen by 77%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Shanghai Zhongyida appears to been achieving more with less, since the business is using 31% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

One more thing to note, Shanghai Zhongyida has decreased current liabilities to 21% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Shanghai Zhongyida has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Shanghai Zhongyida's ROCE

In a nutshell, we're pleased to see that Shanghai Zhongyida has been able to generate higher returns from less capital. Since the stock has returned a solid 41% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Shanghai Zhongyida can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Shanghai Zhongyida, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

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.