Investors Shouldn't Overlook Zhejiang Jingsheng Mechanical & Electrical's (SZSE:300316) Impressive Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. And in light of that, the trends we're seeing at Zhejiang Jingsheng Mechanical & Electrical's (SZSE:300316) look very promising so lets take a look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Zhejiang Jingsheng Mechanical & Electrical:

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

0.30 = CN¥5.7b ÷ (CN¥35b - CN¥16b) (Based on the trailing twelve months to June 2024).

Therefore, Zhejiang Jingsheng Mechanical & Electrical has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 4.3%.

Check out our latest analysis for Zhejiang Jingsheng Mechanical & Electrical

In the above chart we have measured Zhejiang Jingsheng Mechanical & Electrical'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 Jingsheng Mechanical & Electrical for free.

How Are Returns Trending?

Investors would be pleased with what's happening at Zhejiang Jingsheng Mechanical & Electrical. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 30%. The amount of capital employed has increased too, by 333%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 45% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Zhejiang Jingsheng Mechanical & Electrical's ROCE

To sum it up, Zhejiang Jingsheng Mechanical & Electrical has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 89% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zhejiang Jingsheng Mechanical & Electrical (of which 1 is significant!) that you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.