If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. However, after briefly looking over the numbers, we don't think Zhulian Corporation Berhad (KLSE:ZHULIAN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Zhulian Corporation Berhad, this is the formula:

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

0.054 = RM24m ÷ (RM492m - RM39m) (Based on the trailing twelve months to February 2024).

Therefore, Zhulian Corporation Berhad has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

See our latest analysis for Zhulian Corporation Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zhulian Corporation Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zhulian Corporation Berhad.

How Are Returns Trending?

We're a bit concerned with the trends, because the business is applying 23% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 5.4%, it's hard to get excited about these developments.

Our Take On Zhulian Corporation Berhad's ROCE

In summary, Zhulian Corporation Berhad isn't reinvesting funds back into the business and returns aren't growing. Although the market must be expecting these trends to improve because the stock has gained 48% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Zhulian Corporation Berhad, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Zhulian Corporation Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.