To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Jiangyin Zhongnan Heavy IndustriesLtd (SZSE:002445), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Jiangyin Zhongnan Heavy IndustriesLtd is:

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

0.027 = CN¥62m ÷ (CN¥2.6b - CN¥320m) (Based on the trailing twelve months to September 2023).

Therefore, Jiangyin Zhongnan Heavy IndustriesLtd has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 3.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangyin Zhongnan Heavy IndustriesLtd's ROCE against it's prior returns. If you'd like to look at how Jiangyin Zhongnan Heavy IndustriesLtd has performed in the past in other metrics, you can view this free graph of Jiangyin Zhongnan Heavy IndustriesLtd's past earnings, revenue and cash flow.

What Can We Tell From Jiangyin Zhongnan Heavy IndustriesLtd's ROCE Trend?

Over the past five years, Jiangyin Zhongnan Heavy IndustriesLtd's ROCE has remained relatively flat while the business is using 52% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 12% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Jiangyin Zhongnan Heavy IndustriesLtd's ROCE

In summary, Jiangyin Zhongnan Heavy IndustriesLtd isn't reinvesting funds back into the business and returns aren't growing. Unsurprisingly, the stock has only gained 5.0% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Jiangyin Zhongnan Heavy IndustriesLtd does have some risks though, and we've spotted 1 warning sign for Jiangyin Zhongnan Heavy IndustriesLtd that you might be interested in.

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.