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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Zhejiang Wellsun Intelligent TechnologyLtd's (SZSE:300882) ROCE trend, we were very happy with what we saw.
What Is 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 Zhejiang Wellsun Intelligent TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = CN¥260m ÷ (CN¥1.5b - CN¥426m) (Based on the trailing twelve months to September 2023).
Thus, Zhejiang Wellsun Intelligent TechnologyLtd has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Electronic industry average of 5.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Wellsun Intelligent TechnologyLtd's ROCE against it's prior returns. If you're interested in investigating Zhejiang Wellsun Intelligent TechnologyLtd's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Zhejiang Wellsun Intelligent TechnologyLtd Tell Us?
We'd be pretty happy with returns on capital like Zhejiang Wellsun Intelligent TechnologyLtd. Over the past five years, ROCE has remained relatively flat at around 23% and the business has deployed 275% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Zhejiang Wellsun Intelligent TechnologyLtd can keep this up, we'd be very optimistic about its future.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 28% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
What We Can Learn From Zhejiang Wellsun Intelligent TechnologyLtd's ROCE
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. However, despite the favorable fundamentals, the stock has fallen 16% over the last three years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
On a separate note, we've found 1 warning sign for Zhejiang Wellsun Intelligent TechnologyLtd you'll probably want to know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.