To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So on that note, Zhengzhou Coal Mining Machinery Group (SHSE:601717) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Zhengzhou Coal Mining Machinery Group, this is the formula:

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

0.12 = CN¥2.6b ÷ (CN¥37b - CN¥15b) (Based on the trailing twelve months to March 2022).

Thus, Zhengzhou Coal Mining Machinery Group has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Machinery industry.

View our latest analysis for Zhengzhou Coal Mining Machinery Group

In the above chart we have measured Zhengzhou Coal Mining Machinery Group'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 Zhengzhou Coal Mining Machinery Group here for free.

The Trend Of ROCE

The fact that Zhengzhou Coal Mining Machinery Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 12% which is a sight for sore eyes. Not only that, but the company is utilizing 88% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 41% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Zhengzhou Coal Mining Machinery Group's ROCE

In summary, it's great to see that Zhengzhou Coal Mining Machinery Group has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 192% total return over the last three years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 2 warning signs with Zhengzhou Coal Mining Machinery Group and understanding these should be part of your investment process.

While Zhengzhou Coal Mining Machinery Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.