If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Zhejiang Taotao Vehicles (SZSE:301345) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Zhejiang Taotao Vehicles is:

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

0.084 = CN¥249m ÷ (CN¥3.9b - CN¥925m) (Based on the trailing twelve months to September 2023).

Thus, Zhejiang Taotao Vehicles has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Auto industry average of 3.0%.

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

The Trend Of ROCE

On the surface, the trend of ROCE at Zhejiang Taotao Vehicles doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last five years. However it looks like Zhejiang Taotao Vehicles 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.

On a side note, Zhejiang Taotao Vehicles has done well to pay down its current liabilities to 24% 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.

What We Can Learn From Zhejiang Taotao Vehicles' ROCE

Bringing it all together, while we're somewhat encouraged by Zhejiang Taotao Vehicles' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 26% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Zhejiang Taotao Vehicles, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.