If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Zhongshan Broad-Ocean Motor's (SZSE:002249) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Zhongshan Broad-Ocean Motor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = CN¥627m ÷ (CN¥17b - CN¥6.8b) (Based on the trailing twelve months to March 2024).
Therefore, Zhongshan Broad-Ocean Motor has an ROCE of 6.3%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhongshan Broad-Ocean Motor's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhongshan Broad-Ocean Motor.
What Can We Tell From Zhongshan Broad-Ocean Motor's ROCE Trend?
We're delighted to see that Zhongshan Broad-Ocean Motor is reaping rewards from its investments and has now broken into profitability. The company now earns 6.3% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Zhongshan Broad-Ocean Motor has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
On a side note, Zhongshan Broad-Ocean Motor's current liabilities are still rather high at 40% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Zhongshan Broad-Ocean Motor's ROCE
In summary, we're delighted to see that Zhongshan Broad-Ocean Motor has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 22% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
If you want to continue researching Zhongshan Broad-Ocean Motor, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.