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. 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 Wellsun Intelligent TechnologyLtd (SZSE:300882) 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)

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. To calculate this metric for Zhejiang Wellsun Intelligent TechnologyLtd, this is the formula:

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

0.13 = CN¥148m ÷ (CN¥1.5b - CN¥370m) (Based on the trailing twelve months to September 2024).

So, Zhejiang Wellsun Intelligent TechnologyLtd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Electronic industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Wellsun Intelligent TechnologyLtd'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 Wellsun Intelligent TechnologyLtd.

What Does the ROCE Trend For Zhejiang Wellsun Intelligent TechnologyLtd Tell Us?

On the surface, the trend of ROCE at Zhejiang Wellsun Intelligent TechnologyLtd doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 13%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Zhejiang Wellsun Intelligent TechnologyLtd has decreased its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Wellsun Intelligent TechnologyLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Zhejiang Wellsun Intelligent TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 10% in the last three years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

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

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.