There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at TCL Zhonghuan Renewable Energy TechnologyLtd (SZSE:002129), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for TCL Zhonghuan Renewable Energy TechnologyLtd, this is the formula:

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

0.034 = CN¥3.5b ÷ (CN¥125b - CN¥22b) (Based on the trailing twelve months to March 2024).

So, TCL Zhonghuan Renewable Energy TechnologyLtd has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.6%.

In the above chart we have measured TCL Zhonghuan Renewable Energy TechnologyLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for TCL Zhonghuan Renewable Energy TechnologyLtd .

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at TCL Zhonghuan Renewable Energy TechnologyLtd. The company has employed 277% more capital in the last five years, and the returns on that capital have remained stable at 3.4%. 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.

On a side note, TCL Zhonghuan Renewable Energy TechnologyLtd has done well to reduce current liabilities to 18% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On TCL Zhonghuan Renewable Energy TechnologyLtd's ROCE

In summary, TCL Zhonghuan Renewable Energy TechnologyLtd has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 11% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with TCL Zhonghuan Renewable Energy TechnologyLtd (including 2 which are potentially serious) .

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.