If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. 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 Shanghai Zhenhua Heavy Industries (SHSE:900947) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Shanghai Zhenhua Heavy Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = CN¥1.6b ÷ (CN¥84b - CN¥48b) (Based on the trailing twelve months to September 2023).
Thus, Shanghai Zhenhua Heavy Industries has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.1%.
See our latest analysis for Shanghai Zhenhua Heavy Industries
In the above chart we have measured Shanghai Zhenhua Heavy Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shanghai Zhenhua Heavy Industries.
What Can We Tell From Shanghai Zhenhua Heavy Industries' ROCE Trend?
There hasn't been much to report for Shanghai Zhenhua Heavy Industries' returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Shanghai Zhenhua Heavy Industries to be a multi-bagger going forward.
On a separate but related note, it's important to know that Shanghai Zhenhua Heavy Industries has a current liabilities to total assets ratio of 57%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
In a nutshell, Shanghai Zhenhua Heavy Industries has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 39% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Shanghai Zhenhua Heavy Industries has the makings of a multi-bagger.
If you'd like to know more about Shanghai Zhenhua Heavy Industries, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.
While Shanghai Zhenhua Heavy Industries 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.