To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Zhongman Petroleum and Natural Gas GroupLtd's (SHSE:603619) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Zhongman Petroleum and Natural Gas GroupLtd is:

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

0.24 = CN¥1.2b ÷ (CN¥8.7b - CN¥3.4b) (Based on the trailing twelve months to September 2023).

Thus, Zhongman Petroleum and Natural Gas GroupLtd has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 7.3%.

In the above chart we have measured Zhongman Petroleum and Natural Gas GroupLtd'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 Zhongman Petroleum and Natural Gas GroupLtd for free.

What Can We Tell From Zhongman Petroleum and Natural Gas GroupLtd's ROCE Trend?

Zhongman Petroleum and Natural Gas GroupLtd is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 24%. 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 106%. So we're very much inspired by what we're seeing at Zhongman Petroleum and Natural Gas GroupLtd thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Zhongman Petroleum and Natural Gas GroupLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 57% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing Zhongman Petroleum and Natural Gas GroupLtd we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

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.