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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Tenfu (Cayman) Holdings (HKG:6868) 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 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 Tenfu (Cayman) Holdings:

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

0.17 = CN¥338m ÷ (CN¥3.0b - CN¥1.0b) (Based on the trailing twelve months to June 2023).

Therefore, Tenfu (Cayman) Holdings has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.3% it's much better.

View our latest analysis for Tenfu (Cayman) Holdings

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

So How Is Tenfu (Cayman) Holdings' ROCE Trending?

Over the past five years, Tenfu (Cayman) Holdings' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Tenfu (Cayman) Holdings to be a multi-bagger going forward.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 34% of total assets, this reported ROCE would probably be less than17% because total capital employed would be higher.The 17% ROCE could be even lower if current liabilities weren't 34% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Bottom Line On Tenfu (Cayman) Holdings' ROCE

We can conclude that in regards to Tenfu (Cayman) Holdings' returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 6.5% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing: We've identified 2 warning signs with Tenfu (Cayman) Holdings (at least 1 which is significant) , and understanding them would certainly be useful.

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.