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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Zhejiang Hengtong HoldingLtd (SHSE:600226) 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Zhejiang Hengtong HoldingLtd, this is the formula:

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

0.014 = CN¥56m ÷ (CN¥4.6b - CN¥593m) (Based on the trailing twelve months to June 2024).

So, Zhejiang Hengtong HoldingLtd has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Hengtong HoldingLtd's ROCE against it's prior returns. If you'd like to look at how Zhejiang Hengtong HoldingLtd has performed in the past in other metrics, you can view this free graph of Zhejiang Hengtong HoldingLtd's past earnings, revenue and cash flow.

So How Is Zhejiang Hengtong HoldingLtd's ROCE Trending?

There hasn't been much to report for Zhejiang Hengtong HoldingLtd's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Zhejiang Hengtong HoldingLtd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

What We Can Learn From Zhejiang Hengtong HoldingLtd's ROCE

In summary, Zhejiang Hengtong HoldingLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 33% 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.

On a separate note, we've found 1 warning sign for Zhejiang Hengtong HoldingLtd you'll probably want to know about.

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.