There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Zhejiang Huangma TechnologyLtd (SHSE:603181), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zhejiang Huangma TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = CN¥165m ÷ (CN¥3.3b - CN¥373m) (Based on the trailing twelve months to June 2023).
So, Zhejiang Huangma TechnologyLtd has an ROCE of 5.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.
See our latest analysis for Zhejiang Huangma TechnologyLtd
Above you can see how the current ROCE for Zhejiang Huangma TechnologyLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Zhejiang Huangma TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.7% from 15% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line On Zhejiang Huangma TechnologyLtd's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Zhejiang Huangma TechnologyLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 122% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you'd like to know about the risks facing Zhejiang Huangma TechnologyLtd, we've discovered 1 warning sign that you should be aware of.
While Zhejiang Huangma TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.