If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 China Commodities City Group (SHSE:600415) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 China Commodities City Group is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.036 = CN¥806m ÷ (CN¥34b - CN¥12b) (Based on the trailing twelve months to September 2023).

Therefore, Zhejiang China Commodities City Group has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 5.3%.

See our latest analysis for Zhejiang China Commodities City Group

In the above chart we have measured Zhejiang China Commodities City Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Zhejiang China Commodities City Group.

How Are Returns Trending?

In terms of Zhejiang China Commodities City Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.6% from 8.4% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Zhejiang China Commodities City Group has decreased its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Zhejiang China Commodities City Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang China Commodities City Group is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 99% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Zhejiang China Commodities City Group does have some risks though, and we've spotted 2 warning signs for Zhejiang China Commodities City Group that you might be interested in.

While Zhejiang China Commodities City Group isn't earning the highest return, check out this free list of companies that are 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.