Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Zhejiang Dongri Limited (SHSE:600113) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Zhejiang Dongri Limited, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = CN¥194m ÷ (CN¥3.7b - CN¥930m) (Based on the trailing twelve months to December 2023).
So, Zhejiang Dongri Limited has an ROCE of 6.9%. Even though it's in line with the industry average of 6.9%, it's still a low return by itself.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhejiang Dongri Limited's ROCE against it's prior returns. If you'd like to look at how Zhejiang Dongri Limited has performed in the past in other metrics, you can view this free graph of Zhejiang Dongri Limited's past earnings, revenue and cash flow.
What Does the ROCE Trend For Zhejiang Dongri Limited Tell Us?
The trend of ROCE doesn't look fantastic because it's fallen from 16% five years ago, while the business's capital employed increased by 229%. That being said, Zhejiang Dongri Limited raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Zhejiang Dongri Limited might not have received a full period of earnings contribution from it.
The Bottom Line On Zhejiang Dongri Limited's ROCE
To conclude, we've found that Zhejiang Dongri Limited is reinvesting in the business, but returns have been falling. Since the stock has declined 15% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Zhejiang Dongri Limited does have some risks though, and we've spotted 2 warning signs for Zhejiang Dongri Limited that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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.