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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Zhejiang Jingsheng Mechanical & Electrical's (SZSE:300316) look very promising so lets take a look.
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. The formula for this calculation on Zhejiang Jingsheng Mechanical & Electrical is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = CN¥5.5b ÷ (CN¥36b - CN¥20b) (Based on the trailing twelve months to September 2023).
Therefore, Zhejiang Jingsheng Mechanical & Electrical has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 4.2%.
View our latest analysis for Zhejiang Jingsheng Mechanical & Electrical
In the above chart we have measured Zhejiang Jingsheng Mechanical & Electrical's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
Zhejiang Jingsheng Mechanical & Electrical is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 35%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 275%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 56% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
The Bottom Line On Zhejiang Jingsheng Mechanical & Electrical's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Zhejiang Jingsheng Mechanical & Electrical has. And a remarkable 320% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Zhejiang Jingsheng Mechanical & Electrical can keep these trends up, it could have a bright future ahead.
One more thing: We've identified 2 warning signs with Zhejiang Jingsheng Mechanical & Electrical (at least 1 which is potentially serious) , and understanding these would certainly be useful.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.