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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Zhejiang Sanhua Intelligent ControlsLtd (SZSE:002050), we don't think it's current trends fit the mold of a multi-bagger.

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 Sanhua Intelligent ControlsLtd is:

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

0.12 = CN¥2.1b ÷ (CN¥25b - CN¥8.6b) (Based on the trailing twelve months to June 2022).

Thus, 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 6.9% it's much better.

View 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

On the surface, the trend of ROCE at Zhejiang Sanhua Intelligent ControlsLtd doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 12%. 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.

The Bottom Line On Zhejiang Sanhua Intelligent ControlsLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zhejiang Sanhua Intelligent ControlsLtd. And the stock has done incredibly well with a 216% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 3 warning signs with Zhejiang Sanhua Intelligent ControlsLtd (at least 2 which are concerning) , and understanding them would certainly be useful.

While Zhejiang Sanhua Intelligent ControlsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.