There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Jiangsu Zeyu Intelligent PowerLtd (SZSE:301179) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Jiangsu Zeyu Intelligent PowerLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥256m ÷ (CN¥3.3b - CN¥973m) (Based on the trailing twelve months to September 2023).
Therefore, Jiangsu Zeyu Intelligent PowerLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 4.4% it's much better.
In the above chart we have measured Jiangsu Zeyu Intelligent PowerLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jiangsu Zeyu Intelligent PowerLtd for free.
The Trend Of ROCE
When we looked at the ROCE trend at Jiangsu Zeyu Intelligent PowerLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 32% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Jiangsu Zeyu Intelligent PowerLtd has decreased its current liabilities to 30% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On Jiangsu Zeyu Intelligent PowerLtd's ROCE
While returns have fallen for Jiangsu Zeyu Intelligent PowerLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 11% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
On a final note, we found 2 warning signs for Jiangsu Zeyu Intelligent PowerLtd (1 is a bit unpleasant) you should be aware of.
While Jiangsu Zeyu Intelligent PowerLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.