If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. So, when we ran our eye over ZJMI Environmental Energy's (SHSE:603071) trend of ROCE, we really liked what we saw.
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 ZJMI Environmental Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = CN¥1.8b ÷ (CN¥10b - CN¥4.3b) (Based on the trailing twelve months to March 2023).
So, ZJMI Environmental Energy has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.
Check out our latest analysis for ZJMI Environmental Energy
Historical performance is a great place to start when researching a stock so above you can see the gauge for ZJMI Environmental Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ZJMI Environmental Energy, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
ZJMI Environmental Energy deserves to be commended in regards to it's returns. The company has consistently earned 31% for the last four years, and the capital employed within the business has risen 118% in that time. Now considering ROCE is an attractive 31%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If ZJMI Environmental Energy can keep this up, we'd be very optimistic about its future.
On a side note, ZJMI Environmental Energy has done well to reduce current liabilities to 42% of total assets over the last four years. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 42%, some of that risk is still prevalent.
What We Can Learn From ZJMI Environmental Energy's ROCE
In short, we'd argue ZJMI Environmental Energy has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Despite the good fundamentals, total returns from the stock have been virtually flat over the last year. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
One more thing to note, we've identified 1 warning sign with ZJMI Environmental Energy and understanding it should be part of your investment process.
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.