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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think ZheJiang HuaSheng TechnologyLtd (SHSE:605180) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 HuaSheng TechnologyLtd is:

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

0.013 = CN¥15m ÷ (CN¥1.1b - CN¥20m) (Based on the trailing twelve months to September 2023).

Therefore, ZheJiang HuaSheng TechnologyLtd has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.5%.

Check out our latest analysis for ZheJiang HuaSheng TechnologyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for ZheJiang HuaSheng TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ZheJiang HuaSheng TechnologyLtd, check out these free graphs here.

What Does the ROCE Trend For ZheJiang HuaSheng TechnologyLtd Tell Us?

When we looked at the ROCE trend at ZheJiang HuaSheng TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 1.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for ZheJiang HuaSheng TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 40% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 3 warning signs for ZheJiang HuaSheng TechnologyLtd (1 is a bit concerning) 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.