To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Zhejiang Shuanghuan DrivelineLtd (SZSE:002472) so let's look a bit deeper.

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 Zhejiang Shuanghuan DrivelineLtd is:

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

0.085 = CN¥801m ÷ (CN¥13b - CN¥3.8b) (Based on the trailing twelve months to September 2023).

Thus, Zhejiang Shuanghuan DrivelineLtd has an ROCE of 8.5%. On its own that's a low return, but compared to the average of 5.8% generated by the Auto Components industry, it's much better.

Check out our latest analysis for Zhejiang Shuanghuan DrivelineLtd

In the above chart we have measured Zhejiang Shuanghuan DrivelineLtd'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 Zhejiang Shuanghuan DrivelineLtd here for free.

What Does the ROCE Trend For Zhejiang Shuanghuan DrivelineLtd Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.5%. The amount of capital employed has increased too, by 75%. So we're very much inspired by what we're seeing at Zhejiang Shuanghuan DrivelineLtd thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Zhejiang Shuanghuan DrivelineLtd has. Since the stock has returned a staggering 323% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Zhejiang Shuanghuan DrivelineLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Zhejiang Shuanghuan DrivelineLtd 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.