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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Jiecang Linear Motion TechnologyLtd (SHSE:603583) and its ROCE trend, we weren't exactly thrilled.
What Is 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 Jiecang Linear Motion TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = CN¥217m ÷ (CN¥6.6b - CN¥2.0b) (Based on the trailing twelve months to September 2023).
Thus, Zhejiang Jiecang Linear Motion TechnologyLtd has an ROCE of 4.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.0%.
View our latest analysis for Zhejiang Jiecang Linear Motion TechnologyLtd
Above you can see how the current ROCE for Zhejiang Jiecang Linear Motion TechnologyLtd 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 Jiecang Linear Motion TechnologyLtd here for free.
What The Trend Of ROCE Can Tell Us
The trend of ROCE doesn't look fantastic because it's fallen from 17% five years ago, while the business's capital employed increased by 213%. Usually this isn't ideal, but given Zhejiang Jiecang Linear Motion TechnologyLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Zhejiang Jiecang Linear Motion TechnologyLtd's earnings and if they change as a result from the capital raise.
On a side note, Zhejiang Jiecang Linear Motion TechnologyLtd's current liabilities have increased over the last five years to 30% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.6%. 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.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Zhejiang Jiecang Linear Motion TechnologyLtd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 39% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Like most companies, Zhejiang Jiecang Linear Motion TechnologyLtd does come with some risks, and we've found 2 warning signs that you should be aware of.
While Zhejiang Jiecang Linear Motion TechnologyLtd 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.