There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Zhejiang Asia-Pacific Mechanical & ElectronicLtd's (SZSE:002284) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Zhejiang Asia-Pacific Mechanical & ElectronicLtd, this is the formula:

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

0.033 = CN¥97m ÷ (CN¥6.8b - CN¥3.8b) (Based on the trailing twelve months to September 2023).

So, Zhejiang Asia-Pacific Mechanical & ElectronicLtd has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 5.9%.

Check out our latest analysis for Zhejiang Asia-Pacific Mechanical & ElectronicLtd

Above you can see how the current ROCE for Zhejiang Asia-Pacific Mechanical & ElectronicLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Asia-Pacific Mechanical & ElectronicLtd here for free.

What The Trend Of ROCE Can Tell Us

It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. We found that the returns on capital employed over the last five years have risen by 40%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 22% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

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 56% 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.

Our Take On Zhejiang Asia-Pacific Mechanical & ElectronicLtd's ROCE

In a nutshell, we're pleased to see that Zhejiang Asia-Pacific Mechanical & ElectronicLtd has been able to generate higher returns from less capital. Since the stock has returned a staggering 126% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Zhejiang Asia-Pacific Mechanical & ElectronicLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Zhejiang Asia-Pacific Mechanical & ElectronicLtd 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.