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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Zhejiang Realsun ChemicalLtd (SZSE:301212) 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)

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. The formula for this calculation on Zhejiang Realsun ChemicalLtd is:

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

0.022 = CN¥31m ÷ (CN¥1.7b - CN¥254m) (Based on the trailing twelve months to March 2024).

Therefore, Zhejiang Realsun ChemicalLtd has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 5.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Realsun ChemicalLtd's ROCE against it's prior returns. If you're interested in investigating Zhejiang Realsun ChemicalLtd's past further, check out this free graph covering Zhejiang Realsun ChemicalLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Zhejiang Realsun ChemicalLtd Tell Us?

When we looked at the ROCE trend at Zhejiang Realsun ChemicalLtd, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 2.2%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Zhejiang Realsun ChemicalLtd has decreased its current liabilities to 15% 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.

In Conclusion...

We're a bit apprehensive about Zhejiang Realsun ChemicalLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last year have experienced a 24% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Zhejiang Realsun ChemicalLtd (including 2 which are potentially serious) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.