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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Zhejiang Meorient Commerce Exhibition (SZSE:300795) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Zhejiang Meorient Commerce Exhibition is:

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

0.11 = CN¥52m ÷ (CN¥723m - CN¥256m) (Based on the trailing twelve months to March 2023).

Thus, Zhejiang Meorient Commerce Exhibition has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 4.3% it's much better.

See our latest analysis for Zhejiang Meorient Commerce Exhibition

In the above chart we have measured Zhejiang Meorient Commerce Exhibition's 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 Zhejiang Meorient Commerce Exhibition here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Zhejiang Meorient Commerce Exhibition doesn't inspire confidence. Around five years ago the returns on capital were 37%, but since then they've fallen to 11%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 35%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 11%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Zhejiang Meorient Commerce Exhibition's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Meorient Commerce Exhibition is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 159% return over the last three years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know about the risks facing Zhejiang Meorient Commerce Exhibition, we've discovered 1 warning sign that 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.