What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Zhongyeda Electric (SZSE:002441) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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 Zhongyeda Electric:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = CN¥320m ÷ (CN¥7.0b - CN¥2.3b) (Based on the trailing twelve months to September 2023).
Therefore, Zhongyeda Electric has an ROCE of 6.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.3%.
See our latest analysis for Zhongyeda Electric
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhongyeda Electric's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Zhongyeda Electric, check out these free graphs here.
So How Is Zhongyeda Electric's ROCE Trending?
The returns on capital haven't changed much for Zhongyeda Electric in recent years. The company has employed 21% more capital in the last five years, and the returns on that capital have remained stable at 6.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line
As we've seen above, Zhongyeda Electric's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 33% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you want to continue researching Zhongyeda Electric, you might be interested to know about the 2 warning signs that our analysis has discovered.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.