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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Zhejiang Bofay Electric (SZSE:001255) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Zhejiang Bofay Electric, this is the formula:

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

0.075 = CN¥60m ÷ (CN¥950m - CN¥146m) (Based on the trailing twelve months to September 2023).

So, Zhejiang Bofay Electric has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 5.5% generated by the Chemicals industry, it's much better.

View our latest analysis for Zhejiang Bofay Electric

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhejiang Bofay Electric's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Zhejiang Bofay Electric's ROCE Trend?

When we looked at the ROCE trend at Zhejiang Bofay Electric, we didn't gain much confidence. Around four years ago the returns on capital were 26%, but since then they've fallen to 7.5%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a related note, Zhejiang Bofay Electric has decreased its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. 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.

In Conclusion...

In summary, we're somewhat concerned by Zhejiang Bofay Electric's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 11% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Zhejiang Bofay Electric (including 1 which is a bit concerning) .

While Zhejiang Bofay Electric 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.