There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Zhonghang Electronic Measuring InstrumentsLtd (SZSE:300114) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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 Zhonghang Electronic Measuring InstrumentsLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = CN¥54m ÷ (CN¥4.1b - CN¥1.3b) (Based on the trailing twelve months to September 2023).
Therefore, Zhonghang Electronic Measuring InstrumentsLtd has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.0%.
View our latest analysis for Zhonghang Electronic Measuring InstrumentsLtd
In the above chart we have measured Zhonghang Electronic Measuring InstrumentsLtd'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 Zhonghang Electronic Measuring InstrumentsLtd here for free.
What Can We Tell From Zhonghang Electronic Measuring InstrumentsLtd's ROCE Trend?
On the surface, the trend of ROCE at Zhonghang Electronic Measuring InstrumentsLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.9% from 12% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Zhonghang Electronic Measuring InstrumentsLtd's ROCE
To conclude, we've found that Zhonghang Electronic Measuring InstrumentsLtd is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 429% gain to shareholders who have held over the last five years. 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 2 warning signs with Zhonghang Electronic Measuring InstrumentsLtd and understanding them should be part of your investment process.
While Zhonghang Electronic Measuring InstrumentsLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
