Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Zhejiang Yuejian Intelligent EquipmentLtd (SHSE:603095) 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 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. The formula for this calculation on Zhejiang Yuejian Intelligent EquipmentLtd is:

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

0.023 = CN¥58m ÷ (CN¥3.1b - CN¥484m) (Based on the trailing twelve months to September 2023).

So, Zhejiang Yuejian Intelligent EquipmentLtd has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.0%.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Yuejian Intelligent EquipmentLtd.

What Can We Tell From Zhejiang Yuejian Intelligent EquipmentLtd's ROCE Trend?

In terms of Zhejiang Yuejian Intelligent EquipmentLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Zhejiang Yuejian Intelligent EquipmentLtd has done well to pay down its current liabilities to 16% 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.

What We Can Learn From Zhejiang Yuejian Intelligent EquipmentLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Zhejiang Yuejian Intelligent EquipmentLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 3.7% in the last three years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Zhejiang Yuejian Intelligent EquipmentLtd does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.