If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating ZHEJIANG DIBAY ELECTRICLtd (SHSE:603320), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for ZHEJIANG DIBAY ELECTRICLtd:

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

0.027 = CN¥29m ÷ (CN¥1.3b - CN¥232m) (Based on the trailing twelve months to September 2023).

Therefore, ZHEJIANG DIBAY ELECTRICLtd has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.1%.

View our latest analysis for ZHEJIANG DIBAY ELECTRICLtd

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at ZHEJIANG DIBAY ELECTRICLtd, we didn't gain much confidence. Around five years ago the returns on capital were 6.5%, but since then they've fallen to 2.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From ZHEJIANG DIBAY ELECTRICLtd's ROCE

In summary, we're somewhat concerned by ZHEJIANG DIBAY ELECTRICLtd's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 32% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with ZHEJIANG DIBAY ELECTRICLtd (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.