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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Zhejiang Chint Electrics (SHSE:601877), we don't think it's current trends fit the mold of a multi-bagger.

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 Chint Electrics is:

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

0.087 = CN¥5.8b ÷ (CN¥111b - CN¥44b) (Based on the trailing twelve months to June 2023).

So, Zhejiang Chint Electrics has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 6.3% generated by the Electrical industry, it's much better.

Check out our latest analysis for Zhejiang Chint Electrics

In the above chart we have measured Zhejiang Chint Electrics' 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 Chint Electrics here for free.

So How Is Zhejiang Chint Electrics' ROCE Trending?

When we looked at the ROCE trend at Zhejiang Chint Electrics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.7% from 12% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Zhejiang Chint Electrics' ROCE

To conclude, we've found that Zhejiang Chint Electrics is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 11% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing, we've spotted 1 warning sign facing Zhejiang Chint Electrics that you might find interesting.

While Zhejiang Chint Electrics 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.