If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after investigating Ningbo Fujia Industrial (SHSE:603219), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Ningbo Fujia Industrial:

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

0.16 = CN¥258m ÷ (CN¥2.7b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

So, Ningbo Fujia Industrial has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 7.7% generated by the Consumer Durables industry.

View our latest analysis for Ningbo Fujia Industrial

Above you can see how the current ROCE for Ningbo Fujia Industrial compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ningbo Fujia Industrial.

What Does the ROCE Trend For Ningbo Fujia Industrial Tell Us?

On the surface, the trend of ROCE at Ningbo Fujia Industrial doesn't inspire confidence. Over the last five years, returns on capital have decreased to 16% from 25% five years ago. However it looks like Ningbo Fujia Industrial might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Ningbo Fujia Industrial has decreased its current liabilities to 41% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Ningbo Fujia Industrial's ROCE

To conclude, we've found that Ningbo Fujia Industrial is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 11% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Ningbo Fujia Industrial, we've spotted 2 warning signs, and 1 of them can't be ignored.

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

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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.