What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. 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 Huayou Cobalt (SHSE:603799) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Zhejiang Huayou Cobalt, this is the formula:

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

0.062 = CN¥5.0b ÷ (CN¥134b - CN¥53b) (Based on the trailing twelve months to September 2023).

Thus, Zhejiang Huayou Cobalt has an ROCE of 6.2%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.

Above you can see how the current ROCE for Zhejiang Huayou Cobalt compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Huayou Cobalt .

What Does the ROCE Trend For Zhejiang Huayou Cobalt Tell Us?

In terms of Zhejiang Huayou Cobalt's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 37% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Zhejiang Huayou Cobalt has decreased its current liabilities to 40% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

To conclude, we've found that Zhejiang Huayou Cobalt is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 20% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know more about Zhejiang Huayou Cobalt, we've spotted 4 warning signs, and 1 of them is significant.

While Zhejiang Huayou Cobalt 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.