What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Zhongjie (Jiangsu) TechnologyLtd (SZSE:301072) 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)

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. The formula for this calculation on Zhongjie (Jiangsu) TechnologyLtd is:

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

0.02 = CN¥17m ÷ (CN¥1.1b - CN¥293m) (Based on the trailing twelve months to September 2023).

So, Zhongjie (Jiangsu) TechnologyLtd has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhongjie (Jiangsu) TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Zhongjie (Jiangsu) TechnologyLtd's past further, check out this free graph covering Zhongjie (Jiangsu) TechnologyLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Zhongjie (Jiangsu) TechnologyLtd, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 2.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

While returns have fallen for Zhongjie (Jiangsu) TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last year have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Zhongjie (Jiangsu) TechnologyLtd (of which 2 can't be ignored!) that you should know about.

While Zhongjie (Jiangsu) TechnologyLtd 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.