There are a few key trends to look for if we want to identify the next 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. 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 Zhejiang Provincial New Energy Investment Group (SHSE:600032) 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. To calculate this metric for Zhejiang Provincial New Energy Investment Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = CN¥1.8b ÷ (CN¥51b - CN¥6.7b) (Based on the trailing twelve months to September 2023).
Thus, Zhejiang Provincial New Energy Investment Group has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 5.3%.
In the above chart we have measured Zhejiang Provincial New Energy Investment Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Provincial New Energy Investment Group for free.
What Can We Tell From Zhejiang Provincial New Energy Investment Group's ROCE Trend?
There are better returns on capital out there than what we're seeing at Zhejiang Provincial New Energy Investment Group. The company has employed 233% more capital in the last five years, and the returns on that capital have remained stable at 4.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On Zhejiang Provincial New Energy Investment Group's ROCE
Long story short, while Zhejiang Provincial New Energy Investment Group has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 32% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Zhejiang Provincial New Energy Investment Group does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.
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.
