There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at the ROCE trend of Shanghai Zhonggu Logistics (SHSE:603565) we really liked what we saw.

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. Analysts use this formula to calculate it for Shanghai Zhonggu Logistics:

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

0.23 = CN¥3.2b ÷ (CN¥19b - CN¥5.5b) (Based on the trailing twelve months to June 2022).

So, Shanghai Zhonggu Logistics has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

View our latest analysis for Shanghai Zhonggu Logistics

In the above chart we have measured Shanghai Zhonggu Logistics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shanghai Zhonggu Logistics here for free.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Shanghai Zhonggu Logistics. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 600% more capital is being employed now too. So we're very much inspired by what we're seeing at Shanghai Zhonggu Logistics thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Shanghai Zhonggu Logistics has. And since the stock has fallen 22% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Shanghai Zhonggu Logistics does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.