If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Having said that, from a first glance at Zhejiang Sling Automobile Bearing (SZSE:301550) 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 Sling Automobile Bearing:

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

0.094 = CN¥161m ÷ (CN¥2.1b - CN¥385m) (Based on the trailing twelve months to September 2024).

So, Zhejiang Sling Automobile Bearing has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 7.0% generated by the Auto Components industry, it's much better.

Above you can see how the current ROCE for Zhejiang Sling Automobile Bearing compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Sling Automobile Bearing for free.

What Can We Tell From Zhejiang Sling Automobile Bearing's ROCE Trend?

The returns on capital haven't changed much for Zhejiang Sling Automobile Bearing in recent years. The company has consistently earned 9.4% for the last five years, and the capital employed within the business has risen 650% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 18% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Zhejiang Sling Automobile Bearing's ROCE

In conclusion, Zhejiang Sling Automobile Bearing has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 46% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 2 warning signs facing Zhejiang Sling Automobile Bearing that you might find interesting.

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.