Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shandong Zhangqiu Blower (SZSE:002598), 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 Shandong Zhangqiu Blower is:

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

0.098 = CN¥116m ÷ (CN¥2.4b - CN¥1.2b) (Based on the trailing twelve months to June 2023).

Thus, Shandong Zhangqiu Blower has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 6.4%.

View our latest analysis for Shandong Zhangqiu Blower

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shandong Zhangqiu Blower's ROCE against it's prior returns. If you're interested in investigating Shandong Zhangqiu Blower's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Shandong Zhangqiu Blower's historical ROCE trend, it doesn't exactly demand attention. The company has employed 43% more capital in the last five years, and the returns on that capital have remained stable at 9.8%. 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.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 50% of total assets, this reported ROCE would probably be less than9.8% because total capital employed would be higher.The 9.8% ROCE could be even lower if current liabilities weren't 50% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

In Conclusion...

Long story short, while Shandong Zhangqiu Blower has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 54% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 1 warning sign with Shandong Zhangqiu Blower and understanding this should be part of your investment process.

While Shandong Zhangqiu Blower 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.