Zhongjie (Jiangsu) TechnologyLtd (SZSE:301072) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Zhongjie (Jiangsu) TechnologyLtd (SZSE:301072), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Zhongjie (Jiangsu) TechnologyLtd:

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

0.015 = CN¥13m ÷ (CN¥1.2b - CN¥342m) (Based on the trailing twelve months to March 2024).

So, Zhongjie (Jiangsu) TechnologyLtd has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.9%.

See our latest analysis for Zhongjie (Jiangsu) TechnologyLtd

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

How Are Returns Trending?

On the surface, the trend of ROCE at Zhongjie (Jiangsu) TechnologyLtd doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 1.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, Zhongjie (Jiangsu) TechnologyLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 17% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Zhongjie (Jiangsu) TechnologyLtd has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Zhongjie (Jiangsu) TechnologyLtd (including 2 which are a bit unpleasant) .

While Zhongjie (Jiangsu) TechnologyLtd 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.