Shareholders Would Enjoy A Repeat Of Zhejiang Jingsheng Mechanical & Electrical's (SZSE:300316) Recent Growth In Returns

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, the ROCE of Zhejiang Jingsheng Mechanical & Electrical (SZSE:300316) looks great, so lets see what the trend can tell us.

What Is Return On Capital Employed (ROCE)?

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 Jingsheng Mechanical & Electrical, this is the formula:

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

0.25 = CN¥4.9b ÷ (CN¥34b - CN¥14b) (Based on the trailing twelve months to September 2024).

So, Zhejiang Jingsheng Mechanical & Electrical has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 5.0%.

See our latest analysis for Zhejiang Jingsheng Mechanical & Electrical

Above you can see how the current ROCE for Zhejiang Jingsheng Mechanical & Electrical compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Zhejiang Jingsheng Mechanical & Electrical .

What Can We Tell From Zhejiang Jingsheng Mechanical & Electrical's ROCE Trend?

Investors would be pleased with what's happening at Zhejiang Jingsheng Mechanical & Electrical. Over the last five years, returns on capital employed have risen substantially to 25%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 330%. 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 separate but related note, it's important to know that Zhejiang Jingsheng Mechanical & Electrical has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take 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. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 65% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we found 2 warning signs for Zhejiang Jingsheng Mechanical & Electrical (1 shouldn't be ignored) you should be aware of.

Zhejiang Jingsheng Mechanical & Electrical is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.