If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Zhe Jiang Taihua New Material (SHSE:603055) 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 Zhe Jiang Taihua New Material:

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

0.10 = CN¥542m ÷ (CN¥7.3b - CN¥2.0b) (Based on the trailing twelve months to March 2022).

Thus, Zhe Jiang Taihua New Material has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Luxury industry.

Check out our latest analysis for Zhe Jiang Taihua New Material

In the above chart we have measured Zhe Jiang Taihua New Material's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of Zhe Jiang Taihua New Material's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 22% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Zhe Jiang Taihua New Material has done well to pay down its current liabilities to 28% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Zhe Jiang Taihua New Material's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhe Jiang Taihua New Material is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 60% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Zhe Jiang Taihua New Material does come with some risks, and we've found 2 warning signs that you should be aware of.

While Zhe Jiang Taihua New Material 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.