To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Zhongsheng Group Holdings (HKG:881) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Zhongsheng Group Holdings:

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

0.09 = CN¥6.0b ÷ (CN¥107b - CN¥41b) (Based on the trailing twelve months to June 2024).

Thus, Zhongsheng Group Holdings has an ROCE of 9.0%. Even though it's in line with the industry average of 8.9%, it's still a low return by itself.

Above you can see how the current ROCE for Zhongsheng Group Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zhongsheng Group Holdings .

The Trend Of ROCE

When we looked at the ROCE trend at Zhongsheng Group Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.0% from 20% five years ago. However it looks like Zhongsheng Group Holdings 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Zhongsheng Group Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Zhongsheng Group Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 39% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

If you want to continue researching Zhongsheng Group Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Zhongsheng Group Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.