If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Zhejiang Jiahua Energy Chemical IndustryLtd (SHSE:600273) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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 Jiahua Energy Chemical IndustryLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CN¥1.3b ÷ (CN¥12b - CN¥1.7b) (Based on the trailing twelve months to September 2023).
Therefore, Zhejiang Jiahua Energy Chemical IndustryLtd has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.5% it's much better.
View our latest analysis for Zhejiang Jiahua Energy Chemical IndustryLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Jiahua Energy Chemical IndustryLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Zhejiang Jiahua Energy Chemical IndustryLtd, check out these free graphs here.
The Trend Of ROCE
On the surface, the trend of ROCE at Zhejiang Jiahua Energy Chemical IndustryLtd doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 13%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
In Conclusion...
From the above analysis, we find it rather worrisome that returns on capital and sales for Zhejiang Jiahua Energy Chemical IndustryLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Despite the concerning underlying trends, the stock has actually gained 10% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
If you want to continue researching Zhejiang Jiahua Energy Chemical IndustryLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Zhejiang Jiahua Energy Chemical IndustryLtd 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.