If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Zhongcheng Packing Material's (SZSE:002522) returns on capital, so let's have a look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Zhejiang Zhongcheng Packing Material is:

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

0.096 = CN¥217m ÷ (CN¥3.6b - CN¥1.3b) (Based on the trailing twelve months to June 2022).

So, Zhejiang Zhongcheng Packing Material has an ROCE of 9.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 10.0%.

View our latest analysis for Zhejiang Zhongcheng Packing Material

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhejiang Zhongcheng Packing Material's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Zhejiang Zhongcheng Packing Material has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 117% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 37% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Zhejiang Zhongcheng Packing Material's ROCE

To sum it up, Zhejiang Zhongcheng Packing Material is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 57% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 1 warning sign for Zhejiang Zhongcheng Packing Material 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.