If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Changzhou Zhongying Science & Technology (SZSE:300936) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Changzhou Zhongying Science & Technology:

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

0.025 = CN¥27m ÷ (CN¥1.1b - CN¥61m) (Based on the trailing twelve months to September 2023).

Thus, Changzhou Zhongying Science & Technology has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.3%.

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'd like to look at how Changzhou Zhongying Science & Technology has performed in the past in other metrics, you can view this free graph of Changzhou Zhongying Science & Technology's past earnings, revenue and cash flow.

So How Is Changzhou Zhongying Science & Technology's ROCE Trending?

On the surface, the trend of ROCE at Changzhou Zhongying Science & Technology doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.5% from 24% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Changzhou Zhongying Science & Technology is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 25% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Changzhou Zhongying Science & Technology, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While Changzhou Zhongying Science & Technology 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.