Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at JiangSu Zhenjiang New Energy Equipment (SHSE:603507) and its trend of ROCE, we really liked what we saw.

Understanding 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. The formula for this calculation on JiangSu Zhenjiang New Energy Equipment is:

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

0.13 = CN¥456m ÷ (CN¥6.5b - CN¥3.1b) (Based on the trailing twelve months to March 2024).

Therefore, JiangSu Zhenjiang New Energy Equipment has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.6% it's much better.

Above you can see how the current ROCE for JiangSu Zhenjiang New Energy Equipment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering JiangSu Zhenjiang New Energy Equipment for free.

The Trend Of ROCE

The trends we've noticed at JiangSu Zhenjiang New Energy Equipment are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 120%. So we're very much inspired by what we're seeing at JiangSu Zhenjiang New Energy Equipment thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that JiangSu Zhenjiang New Energy Equipment has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On JiangSu Zhenjiang New Energy Equipment's ROCE

To sum it up, JiangSu Zhenjiang New Energy Equipment has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 70% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching JiangSu Zhenjiang New Energy Equipment, you might be interested to know about the 1 warning sign that our analysis has discovered.

While JiangSu Zhenjiang New Energy Equipment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com