If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Zhejiang Jinke Tom Culture Industry (SZSE:300459) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Zhejiang Jinke Tom Culture Industry:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = CN¥402m ÷ (CN¥6.1b - CN¥1.4b) (Based on the trailing twelve months to September 2023).
Thus, Zhejiang Jinke Tom Culture Industry has an ROCE of 8.7%. On its own that's a low return, but compared to the average of 3.8% generated by the Entertainment industry, it's much better.
See our latest analysis for Zhejiang Jinke Tom Culture Industry
Above you can see how the current ROCE for Zhejiang Jinke Tom Culture Industry compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zhejiang Jinke Tom Culture Industry here for free.
What Does the ROCE Trend For Zhejiang Jinke Tom Culture Industry Tell Us?
Over the past five years, Zhejiang Jinke Tom Culture Industry's ROCE has remained relatively flat while the business is using 54% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.
The Bottom Line On Zhejiang Jinke Tom Culture Industry's ROCE
It's a shame to see that Zhejiang Jinke Tom Culture Industry is effectively shrinking in terms of its capital base. Since the stock has gained an impressive 49% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Zhejiang Jinke Tom Culture Industry does have some risks though, and we've spotted 1 warning sign for Zhejiang Jinke Tom Culture Industry that you might be interested in.
While Zhejiang Jinke Tom Culture Industry 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.