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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Zhejiang Huatie Emergency Equipment Science & TechnologyLtd (SHSE:603300), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Zhejiang Huatie Emergency Equipment Science & TechnologyLtd is:

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

0.097 = CN¥1.4b ÷ (CN¥20b - CN¥5.4b) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang Huatie Emergency Equipment Science & TechnologyLtd has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Trade Distributors industry average of 6.1%.

In the above chart we have measured Zhejiang Huatie Emergency Equipment Science & TechnologyLtd'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 Huatie Emergency Equipment Science & TechnologyLtd for free.

The Trend Of ROCE

The returns on capital haven't changed much for Zhejiang Huatie Emergency Equipment Science & TechnologyLtd in recent years. Over the past five years, ROCE has remained relatively flat at around 9.7% and the business has deployed 236% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Zhejiang Huatie Emergency Equipment Science & TechnologyLtd's ROCE

In conclusion, Zhejiang Huatie Emergency Equipment Science & TechnologyLtd has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 87% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 2 warning signs with Zhejiang Huatie Emergency Equipment Science & TechnologyLtd (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While Zhejiang Huatie Emergency Equipment Science & 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.

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