If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at China Zhenhua (Group) Science & Technology (SZSE:000733) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for China Zhenhua (Group) Science & Technology:

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

0.14 = CN¥2.2b ÷ (CN¥18b - CN¥2.1b) (Based on the trailing twelve months to March 2024).

Thus, China Zhenhua (Group) Science & Technology has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Electronic industry.

In the above chart we have measured China Zhenhua (Group) Science & Technology's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Zhenhua (Group) Science & Technology .

How Are Returns Trending?

China Zhenhua (Group) Science & Technology is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 119% more capital is being employed now too. So we're very much inspired by what we're seeing at China Zhenhua (Group) Science & Technology thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 12%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On China Zhenhua (Group) Science & Technology's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what China Zhenhua (Group) Science & Technology has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if China Zhenhua (Group) Science & Technology can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for China Zhenhua (Group) Science & Technology that we think you should be aware of.

While China Zhenhua (Group) Science & Technology 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.

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