Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Zhejiang Sanhua Intelligent ControlsLtd (SZSE:002050) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Zhejiang Sanhua Intelligent ControlsLtd, this is the formula:

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

0.12 = CN¥2.0b ÷ (CN¥24b - CN¥8.1b) (Based on the trailing twelve months to March 2022).

Therefore, Zhejiang Sanhua Intelligent ControlsLtd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 7.5% it's much better.

Check out our latest analysis for Zhejiang Sanhua Intelligent ControlsLtd

In the above chart we have measured Zhejiang Sanhua Intelligent ControlsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Sanhua Intelligent ControlsLtd here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Zhejiang Sanhua Intelligent ControlsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 18% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Zhejiang Sanhua Intelligent ControlsLtd's ROCE

While returns have fallen for Zhejiang Sanhua Intelligent ControlsLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 173% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One final note, you should learn about the 3 warning signs we've spotted with Zhejiang Sanhua Intelligent ControlsLtd (including 1 which is potentially serious) .

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.