To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Zhejiang Shengyang Science and TechnologyLtd (SHSE:603703) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Zhejiang Shengyang Science and TechnologyLtd, this is the formula:

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

0.0018 = CN¥1.7m ÷ (CN¥2.0b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

Thus, Zhejiang Shengyang Science and TechnologyLtd has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Communications industry average of 4.1%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Shengyang Science and TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Zhejiang Shengyang Science and TechnologyLtd's past further, check out this free graph covering Zhejiang Shengyang Science and TechnologyLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The fact that Zhejiang Shengyang Science and TechnologyLtd is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 0.2% on its capital. And unsurprisingly, like most companies trying to break into the black, Zhejiang Shengyang Science and TechnologyLtd is utilizing 59% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, Zhejiang Shengyang Science and TechnologyLtd's current liabilities are still rather high at 54% of total assets. 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 On Zhejiang Shengyang Science and TechnologyLtd's ROCE

Overall, Zhejiang Shengyang Science and TechnologyLtd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to know some of the risks facing Zhejiang Shengyang Science and TechnologyLtd we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

While Zhejiang Shengyang Science and TechnologyLtd 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.