If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. That's why when we briefly looked at Zhejiang Sanhua Intelligent ControlsLtd's (SZSE:002050) ROCE trend, we were pretty 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 Sanhua Intelligent ControlsLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = CN¥3.3b ÷ (CN¥30b - CN¥12b) (Based on the trailing twelve months to September 2023).
Therefore, Zhejiang Sanhua Intelligent ControlsLtd has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.1% it's much better.
Above you can see how the current ROCE for Zhejiang Sanhua Intelligent ControlsLtd 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 Sanhua Intelligent ControlsLtd for free.
So How Is Zhejiang Sanhua Intelligent ControlsLtd's ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 112% more capital in the last five years, and the returns on that capital have remained stable at 18%. 18% is a pretty standard return, and it provides some comfort knowing that Zhejiang Sanhua Intelligent ControlsLtd has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
Our Take On Zhejiang Sanhua Intelligent ControlsLtd's ROCE
In the end, Zhejiang Sanhua Intelligent ControlsLtd has proven its ability to adequately reinvest capital at good rates of return. On top of that, the stock has rewarded shareholders with a remarkable 167% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing to note, we've identified 1 warning sign with Zhejiang Sanhua Intelligent ControlsLtd and understanding it should be part of your investment process.
While Zhejiang Sanhua Intelligent ControlsLtd 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.