To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Zhejiang Jiemei Electronic And Technology (SZSE:002859) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Zhejiang Jiemei Electronic And Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = CN¥273m ÷ (CN¥5.2b - CN¥893m) (Based on the trailing twelve months to December 2023).
Thus, Zhejiang Jiemei Electronic And Technology has an ROCE of 6.4%. In absolute terms, that's a low return, but it's much better than the Packaging industry average of 4.9%.
In the above chart we have measured Zhejiang Jiemei Electronic And Technology'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 Zhejiang Jiemei Electronic And Technology for free.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 17% five years ago, while the business's capital employed increased by 144%. That being said, Zhejiang Jiemei Electronic And Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Zhejiang Jiemei Electronic And Technology probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Zhejiang Jiemei Electronic And Technology is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 20% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
If you want to continue researching Zhejiang Jiemei Electronic And Technology, you might be interested to know about the 1 warning sign that our analysis has discovered.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.