To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Zhejiang FORE Intelligent TechnologyLtd (SZSE:301368) 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 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 FORE Intelligent TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0051 = CN¥5.0m ÷ (CN¥1.2b - CN¥226m) (Based on the trailing twelve months to March 2024).
Thus, Zhejiang FORE Intelligent TechnologyLtd has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.6%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang FORE Intelligent TechnologyLtd's ROCE against it's prior returns. If you'd like to look at how Zhejiang FORE Intelligent TechnologyLtd has performed in the past in other metrics, you can view this free graph of Zhejiang FORE Intelligent TechnologyLtd's past earnings, revenue and cash flow.
So How Is Zhejiang FORE Intelligent TechnologyLtd's ROCE Trending?
In terms of Zhejiang FORE Intelligent TechnologyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Zhejiang FORE Intelligent TechnologyLtd has decreased its current liabilities to 19% 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
While returns have fallen for Zhejiang FORE Intelligent TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 30% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you want to know some of the risks facing Zhejiang FORE Intelligent TechnologyLtd we've found 4 warning signs (3 make us uncomfortable!) that you should be aware of before investing here.
While Zhejiang FORE Intelligent TechnologyLtd 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.