To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Yingkou Jinchen Machinery (SHSE:603396) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Yingkou Jinchen Machinery, this is the formula:

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

0.053 = CN¥89m ÷ (CN¥5.3b - CN¥3.7b) (Based on the trailing twelve months to September 2023).

Therefore, Yingkou Jinchen Machinery has an ROCE of 5.3%. On its own that's a low return, but compared to the average of 4.2% generated by the Semiconductor industry, it's much better.

See our latest analysis for Yingkou Jinchen Machinery

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yingkou Jinchen Machinery's ROCE against it's prior returns. If you'd like to look at how Yingkou Jinchen Machinery has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 13% five years ago, while the business's capital employed increased by 90%. That being said, Yingkou Jinchen Machinery 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 Yingkou Jinchen Machinery might not have received a full period of earnings contribution from it.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 69%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.3%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Yingkou Jinchen Machinery is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 162% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One final note, you should learn about the 2 warning signs we've spotted with Yingkou Jinchen Machinery (including 1 which is concerning) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.