If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So when we looked at Zixin Group Holdings (Catalist:42W) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Zixin Group Holdings:

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

0.014 = CN¥7.3m ÷ (CN¥601m - CN¥83m) (Based on the trailing twelve months to September 2022).

Thus, Zixin Group Holdings has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.

See our latest analysis for Zixin Group Holdings

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

What Does the ROCE Trend For Zixin Group Holdings Tell Us?

The fact that Zixin Group Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 1.4% which is a sight for sore eyes. Not only that, but the company is utilizing 46% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Zixin Group Holdings' ROCE

Overall, Zixin Group Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 63% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know about the risks facing Zixin Group Holdings, we've discovered 3 warning signs that you should be aware of.

While Zixin Group Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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