Investors Shouldn't Overlook The Favourable Returns On Capital At Zhejiang Dingli MachineryLtd (SHSE:603338)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Ergo, when we looked at the ROCE trends at Zhejiang Dingli MachineryLtd (SHSE:603338), we liked what we saw.

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

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. To calculate this metric for Zhejiang Dingli MachineryLtd, this is the formula:

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

0.20 = CN¥2.2b ÷ (CN¥15b - CN¥4.6b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Dingli MachineryLtd has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 5.4% earned by companies in a similar industry.

Check out our latest analysis for Zhejiang Dingli MachineryLtd

In the above chart we have measured Zhejiang Dingli MachineryLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Dingli MachineryLtd .

So How Is Zhejiang Dingli MachineryLtd's ROCE Trending?

In terms of Zhejiang Dingli MachineryLtd's history of ROCE, it's quite impressive. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 231% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Our Take On Zhejiang Dingli MachineryLtd's ROCE

In short, we'd argue Zhejiang Dingli MachineryLtd has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. In light of this, the stock has only gained 34% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

Zhejiang Dingli MachineryLtd does have some risks though, and we've spotted 1 warning sign for Zhejiang Dingli MachineryLtd that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.