What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Zhuzhou CRRC Times Electric (HKG:3898) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhuzhou CRRC Times Electric:

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

0.042 = CN¥1.5b ÷ (CN¥46b - CN¥11b) (Based on the trailing twelve months to June 2022).

Therefore, Zhuzhou CRRC Times Electric has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.2%.

View our latest analysis for Zhuzhou CRRC Times Electric

Above you can see how the current ROCE for Zhuzhou CRRC Times Electric compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Zhuzhou CRRC Times Electric Tell Us?

When we looked at the ROCE trend at Zhuzhou CRRC Times Electric, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 4.2%. However it looks like Zhuzhou CRRC Times Electric might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Zhuzhou CRRC Times Electric's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Zhuzhou CRRC Times Electric does have some risks though, and we've spotted 1 warning sign for Zhuzhou CRRC Times Electric that you might be interested in.

While Zhuzhou CRRC Times Electric 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.