There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Zhejiang Meishuo Electric TechnologyLtd (SZSE:301295) and its ROCE trend, we weren't exactly thrilled.

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 Zhejiang Meishuo Electric TechnologyLtd:

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

0.026 = CN¥25m ÷ (CN¥1.2b - CN¥233m) (Based on the trailing twelve months to March 2024).

Thus, Zhejiang Meishuo Electric TechnologyLtd has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.0%.

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Meishuo Electric TechnologyLtd.

So How Is Zhejiang Meishuo Electric TechnologyLtd's ROCE Trending?

When we looked at the ROCE trend at Zhejiang Meishuo Electric TechnologyLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.6% from 36% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Zhejiang Meishuo Electric TechnologyLtd has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Zhejiang Meishuo Electric TechnologyLtd's ROCE

To conclude, we've found that Zhejiang Meishuo Electric TechnologyLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 29% in the last year. Therefore based on the analysis done in this article, we don't think Zhejiang Meishuo Electric TechnologyLtd has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Zhejiang Meishuo Electric TechnologyLtd (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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