If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Zhuzhou Hongda ElectronicsLtd (SZSE:300726) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Zhuzhou Hongda ElectronicsLtd, this is the formula:

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

0.13 = CN¥677m ÷ (CN¥5.7b - CN¥503m) (Based on the trailing twelve months to September 2023).

Therefore, Zhuzhou Hongda ElectronicsLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.0% it's much better.

View our latest analysis for Zhuzhou Hongda ElectronicsLtd

In the above chart we have measured Zhuzhou Hongda ElectronicsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Zhuzhou Hongda ElectronicsLtd's ROCE Trending?

When we looked at the ROCE trend at Zhuzhou Hongda ElectronicsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 17% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Zhuzhou Hongda ElectronicsLtd's ROCE

In summary, we're somewhat concerned by Zhuzhou Hongda ElectronicsLtd's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 106%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to continue researching Zhuzhou Hongda ElectronicsLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.