Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Zhejiang Chinastars New Materials Group (SZSE:301077), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Zhejiang Chinastars New Materials Group is:

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

0.11 = CN¥135m ÷ (CN¥1.9b - CN¥656m) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang Chinastars New Materials Group has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 6.5% it's much better.

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

What Can We Tell From Zhejiang Chinastars New Materials Group's ROCE Trend?

When we looked at the ROCE trend at Zhejiang Chinastars New Materials Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 36% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Zhejiang Chinastars New Materials Group has done well to pay down its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhejiang Chinastars New Materials Group. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Zhejiang Chinastars New Materials Group does come with some risks, and we've found 2 warning signs that you should be aware of.

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.