To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Zhejiang Whyis TechnologyLtd (SZSE:301218), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Zhejiang Whyis TechnologyLtd is:

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

0.007 = CN¥6.5m ÷ (CN¥1.3b - CN¥412m) (Based on the trailing twelve months to September 2023).

So, Zhejiang Whyis TechnologyLtd has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 3.8%.

Check out our latest analysis for Zhejiang Whyis TechnologyLtd

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

How Are Returns Trending?

In terms of Zhejiang Whyis TechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 19% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a related note, Zhejiang Whyis TechnologyLtd has decreased its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Zhejiang Whyis TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 64% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 2 warning signs we've spotted with Zhejiang Whyis TechnologyLtd (including 1 which is concerning) .

While Zhejiang Whyis TechnologyLtd 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.