If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Zhejiang Chinastars New Materials Group (SZSE:301077), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. The formula for this calculation on Zhejiang Chinastars New Materials Group is:

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

0.11 = CN¥144m ÷ (CN¥1.9b - CN¥604m) (Based on the trailing twelve months to March 2025).

So, Zhejiang Chinastars New Materials Group has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.9% generated by the Luxury industry.

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Zhejiang Chinastars New Materials Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 37% 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Zhejiang Chinastars New Materials Group has decreased its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Zhejiang Chinastars New Materials Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Chinastars New Materials Group is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 32% over the last three years, it would appear that investors are upbeat about the future. 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.

On a final note, we've found 2 warning signs for Zhejiang Chinastars New Materials Group that we think you should be aware of.

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.