What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 briefly looking over the numbers, we don't think Zhejiang Jinfei Kaida WheelLtd (SZSE:002863) 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)?

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. Analysts use this formula to calculate it for Zhejiang Jinfei Kaida WheelLtd:

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

0.056 = CN¥186m ÷ (CN¥6.9b - CN¥3.5b) (Based on the trailing twelve months to September 2023).

So, Zhejiang Jinfei Kaida WheelLtd has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhejiang Jinfei Kaida WheelLtd's past further, check out this free graph covering Zhejiang Jinfei Kaida WheelLtd's past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Jinfei Kaida WheelLtd's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 22% five years ago, while the business's capital employed increased by 202%. That being said, Zhejiang Jinfei Kaida WheelLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Zhejiang Jinfei Kaida WheelLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Zhejiang Jinfei Kaida WheelLtd has done well to pay down its current liabilities to 51% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 51% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Zhejiang Jinfei Kaida WheelLtd's ROCE

To conclude, we've found that Zhejiang Jinfei Kaida WheelLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 33% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we found 3 warning signs for Zhejiang Jinfei Kaida WheelLtd (1 doesn't sit too well with us) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.