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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Zhejiang Jiecang Linear Motion TechnologyLtd (SHSE:603583) 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)

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 Zhejiang Jiecang Linear Motion TechnologyLtd:

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

0.072 = CN¥326m ÷ (CN¥6.3b - CN¥1.8b) (Based on the trailing twelve months to March 2024).

So, Zhejiang Jiecang Linear Motion TechnologyLtd has an ROCE of 7.2%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.2%.

In the above chart we have measured Zhejiang Jiecang Linear Motion TechnologyLtd'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 Zhejiang Jiecang Linear Motion TechnologyLtd .

The Trend Of ROCE

We weren't thrilled with the trend because Zhejiang Jiecang Linear Motion TechnologyLtd's ROCE has reduced by 60% over the last five years, while the business employed 167% more capital. That being said, Zhejiang Jiecang Linear Motion TechnologyLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Zhejiang Jiecang Linear Motion TechnologyLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 29%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhejiang Jiecang Linear Motion TechnologyLtd. These trends are starting to be recognized by investors since the stock has delivered a 13% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing, we've spotted 1 warning sign facing Zhejiang Jiecang Linear Motion TechnologyLtd that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.

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