Here's What To Make Of Zhejiang Zomax Transmission's (SHSE:603767) Decelerating Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Zhejiang Zomax Transmission (SHSE:603767) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Zhejiang Zomax Transmission, this is the formula:

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

0.035 = CN¥53m ÷ (CN¥1.7b - CN¥198m) (Based on the trailing twelve months to September 2024).

Therefore, Zhejiang Zomax Transmission has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 7.0%.

See our latest analysis for Zhejiang Zomax Transmission

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Zomax Transmission's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhejiang Zomax Transmission.

The Trend Of ROCE

There hasn't been much to report for Zhejiang Zomax Transmission's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Zhejiang Zomax Transmission to be a multi-bagger going forward.

The Bottom Line

We can conclude that in regards to Zhejiang Zomax Transmission's returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 68% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Zhejiang Zomax Transmission does come with some risks, and we've found 1 warning sign that you should be aware of.

While Zhejiang Zomax Transmission 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.