There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Zhejiang XinchaiLtd (SZSE:301032) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Zhejiang XinchaiLtd:

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

0.04 = CN¥48m ÷ (CN¥2.7b - CN¥1.5b) (Based on the trailing twelve months to June 2024).

So, Zhejiang XinchaiLtd has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Machinery 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 XinchaiLtd'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 Zhejiang XinchaiLtd.

The Trend Of ROCE

In terms of Zhejiang XinchaiLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. However it looks like Zhejiang XinchaiLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Zhejiang XinchaiLtd has a high ratio of current liabilities to total assets of 55%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To conclude, we've found that Zhejiang XinchaiLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 33% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Zhejiang XinchaiLtd does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Zhejiang XinchaiLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.