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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Zhejiang Weixing New Building Materials' (SZSE:002372) ROCE trend, we were very happy with what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Zhejiang Weixing New Building Materials is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = CN¥1.4b ÷ (CN¥6.8b - CN¥1.3b) (Based on the trailing twelve months to September 2023).
Therefore, Zhejiang Weixing New Building Materials has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Building industry average of 6.4%.
Check out our latest analysis for Zhejiang Weixing New Building Materials
Above you can see how the current ROCE for Zhejiang Weixing New Building Materials 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 Weixing New Building Materials here for free.
What Does the ROCE Trend For Zhejiang Weixing New Building Materials Tell Us?
Zhejiang Weixing New Building Materials deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 26% and the business has deployed 63% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Zhejiang Weixing New Building Materials can keep this up, we'd be very optimistic about its future.
The Bottom Line On Zhejiang Weixing New Building Materials' ROCE
In summary, we're delighted to see that Zhejiang Weixing New Building Materials has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And given the stock has only risen 27% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Zhejiang Weixing New Building Materials is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
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.