To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. That's why when we briefly looked at Zhejiang Hailide New MaterialLtd's (SZSE:002206) ROCE trend, we were pretty happy with what we saw.

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

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. To calculate this metric for Zhejiang Hailide New MaterialLtd, this is the formula:

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

0.13 = CN¥557m ÷ (CN¥7.3b - CN¥3.0b) (Based on the trailing twelve months to June 2022).

Therefore, Zhejiang Hailide New MaterialLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.6% it's much better.

View our latest analysis for Zhejiang Hailide New MaterialLtd

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

So How Is Zhejiang Hailide New MaterialLtd's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 58% more capital in the last five years, and the returns on that capital have remained stable at 13%. 13% is a pretty standard return, and it provides some comfort knowing that Zhejiang Hailide New MaterialLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Another thing to note, Zhejiang Hailide New MaterialLtd has a high ratio of current liabilities to total assets of 40%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In the end, Zhejiang Hailide New MaterialLtd has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 6.2% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

On a final note, we found 2 warning signs for Zhejiang Hailide New MaterialLtd (1 can't be ignored) you should be aware of.

While Zhejiang Hailide New MaterialLtd 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.